What is the Average Daily Balance Method?
The average daily balance method is an alternative credit card billing method to the monthly statement method. Under this method, credit card companies calculate interest based on how much you owe each day, rather than an average of how much you owe during a month. This method tends to result in higher interest rates and fees, as card companies need to make more money on interest charges to make up for the fact that they don’t receive interest for the days when you don’t carry an amount due. (Note: the idea behind the last sentence is taken from wikipedia and could be expanded upon by providing a formula for figuring the average daily balance to reflect the APR for the method.)
Advantages of the Average Daily Balance Method
The average daily balance method does not charge an annual fee. Do not incur additional fees for interest calculations. You may pay your card balance in full each month. You may not pay a balance transfer fee if you transfer to another credit card. The average daily balance method does not require a minimum balance to stay in the system. Disadvantages of the Average Daily Balance Method You will be charged an annual fee in most cases. It may result in higher interest rates and fees. Can be more difficult to track monthly account balances.
Disadvantages of the Average Daily Balance Method
You can’t see all the interest charges that you could be paying at the same time each month, due to the spread in the daily interest charge and the average balance calculation. You are paid interest over a period of a year or longer, whereas monthly interest charges can be paid all at once. This makes using this method easier for people who pay off their bills each month, but who don’t understand the long term costs associated with not paying off their credit card bills each month. As mentioned in the above section, having a high balance can result in the possibility of your card being declined for purchases at some places, which can be costly.
It’s very easy to spend money on your credit card, without even realizing it. However, spending more than you have in your checking account can result in consequences including being late on your bill, high interest rates, and potentially a penalty APR which can result in charges being more expensive than it would normally be. As such, the best way to manage your credit card debt is to follow a simple strategy and pay off your card each month. Which Credit Card Finances Best For Me? To answer this question, you first need to understand how much debt you have. You can estimate this by reviewing your recent bank statements, and estimating the amount of money that you spend each month. Alternatively, you can use one of the many online calculators to estimate your own current balance.