filed under: Credit Cards
The average daily balance method is usually used to calculate the interest you owe on your credit card. To calculate, add your daily balances for each day in the billing period and divide by the number of days in the period.
For example, if your daily balances for a 30-day period totaled $30,000, your average daily balance would be $1,000. If your credit card rate was 12%, the periodic interest rate would be 1%. One percent of $1,000 equals $10. This would be the amount of interest you would owe for the month.
The Federal Reserve discusses two alternative methods. These are the previous balance and adjusted balance methods. The previous balance method calculates the interest you owe for your balance at the end of the previous billing period. For example, if your billing period ended on March 20, your next bill would be for the period ended on Feb. 20. The adjusted balance method subtracts any payments since the end of the previous period to calculate your interest.
Card companies give you a grace period on new charges before you owe interest. This is usually between 20 and 25 days. However, a grace period may only apply if you pay your balance in full. Check with your card company to find out how long your grace period is, and whether it applies only if your balance is paid in full.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.