How to Calculate the Average Daily Balance of a Credit Card
At times, consumers ignore what they do not understand. So the dissertation of credit jargon, written in credit card agreements, are often disregarded. However, continuing this logic, can cost you. That frustrating fine print defines your annual percentage rate and the billing method that's associated with your credit card. If you do not know what, and why, you are paying your credit card company; there's a good chance you could be paying them, too much.
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Instructions
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Know the definition of average daily balance. The average daily balance is the formula used by your credit card company to determine what your monthly payments will be. If you pay your bill off at the end of each billing cycle; this will not apply to you. However, if you carry a balance then you will pay a charge for doing so. This is often referred to as a finance charge.
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Know your Annual Percentage Rate, (APR). Your annual percentage rate, or APR, is the price you will pay to your credit card company for being able to borrow their money. In order to determine your average daily balance, you need to know your APR. Your credit card company is required under the Truth in Lending Act to disclose this information in your written credit card agreement. It can also be found on your credit card statements.
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Choose the credit card with the lowest APR, if applicable. It's ideal to choose, or transfer, to a credit card with the lowest interest rate, more commonly called APR. Most of your credit cards should offer an interest rate in the same neighborhood because lenders determine your APR using your credit score and credit report. But if you find that you have a credit card charging an outrageous interest rate for no reason; get rid of it.
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Tally the balances on your credit cards. To calculate your average daily balance, you need to know the balances on your credit card, and the amount you will carry over to the next month. In addition, you need to know how many calendar days are in the month you will be using for your formula.
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Use the formula. The interest accrues on a daily basis for average daily balances. To determine your finance charges, your credit card company multiplies: your balance, your annual percentage rate, and the days in the billing cycle, then divides the number by the number of days in the calendar year. For example: Average daily balance x annual percentage rate (interest) x 31 days/ 365 days ($200 x 18% (A.P.R.) x 31 / 365 days) = $3.06, or your finance charge.
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Tips & Warnings
Avoid finance charges by paying your balance off in full every month. Before choosing a credit card, do comparison shopping.
Interest rates can change at any time; for any reason. Stay away from credit cards that use the two-cycle billing method
