The Average Daily Balance (ADB) on your credit card is the average amount you owe each day during a billing cycle. Credit card companies use this average to determine the interest you need to pay if you carry a balance month to month.

A billing cycle is the period between one statement date and the next for a credit card, typically about a month. During this time, the issuer records all transactions made with your credit card and adds them to your account.

At the end of the billing cycle, the credit card company sends you a statement showing all charges, payments, interest, fees, and other transactions that occurred during that period, along with the total amount you owe.

How to Calculate Your Average Daily Balance

Here’s a detailed explanation of how to calculate the Average Daily Balance (ADB) for your credit card, including the formula and a step-by-step example:

Formula

The formula for calculating the Average Daily Balance (ADB) is:

ADB = Total of Daily Balances / Number of Days in the Billing Cycle

Steps to Calculate ADB

Here are the steps credit card issuers follow to calculate ADB. You can follow the same steps to verify the numbers from your credit card issuer:

1. Track Daily Balances: Record your credit card balance at the end of each day. This includes any purchases, payments, or other charges added to or deducted from your balance.
2. Sum Up Daily Balances: Add all the daily balances together.
3. Divide by Days: Divide the total from step 2 by the total number of days in the billing cycle.

Example

Let’s say your billing cycle is 30 days, starting with a balance of $0. Balance changes are as follows:

• Days 1-10: Your balance is $100(perhapsyoumadea$100 purchase on the first day).
• Day 11: You make a $50payment,reducingthebalanceto$50.
• Days 12-20: The balance remains at $50.
• Day 21: You make another $200purchase,increasingthebalanceto$250.
• Days 22-30: The balance remains at $250.

Step 1: Calculate the Total of Daily Balances:

• Days 1-10: 10 days x $100=$1,000
• Days 11-20: 10 days x $50=$500
• Days 21-30: 10 days x $250=$2,500

Total Daily Balances = $1,000+$500 + $2,500=$4,000

Step 2: Calculate the Average Daily Balance:

ADB = $4,000/30days=$133.33 per day

This $133.33 is the average amount you owe each day during this billing cycle. Your interest for the month will be calculated based on this average balance. If you fail to pay off the entire balance by the payment due date, you’ll only need to pay interest.

Impact on Credit Scores

Your Average Daily Balance primarily impacts your credit score through your credit utilization. However, it also indirectly affects your credit in a few other ways.

A lower ADB also signals to lenders that you don’t overly rely on credit. This can make you look better when applying for new credit or loans.

By keeping a lower ADB, you also pay less interest. This can save money that you can use to pay bills on time or reduce other debts, indirectly boosting your credit score.

Some lenders might consider your ADB when deciding to increase your credit limit. A lower ADB can indicate that you responsibly manage your funds, making you more credible in the eyes of issuers.

In short, managing your ADB well can foster good financial habits, thereby improving your overall credit standing.

Best Practices for Credit Maintenance

Here are some best practices to help balance your ADB and maintain a healthy credit score:

• Repay Balances Often: Make multiple small payments throughout the month to keep your ADB low.
• Monitor Your Charges: Control the amount you charge to your credit card, preventing your balance from getting too high.
• Adjust Credit Limits: If you routinely come close to your credit limit, consider requesting an increase. Do this only if you’re confident you won’t increase your spending accordingly. A higher credit limit can immediately lower your credit utilization ratio.
• Set Balance Alerts: Many credit card issuers allow you to set alerts that notify you when your balance reaches a certain threshold. This can help you closely monitor usage and act swiftly when the balance gets too high.

By following these best practices, you can better control your finances and work towards a higher credit score.

Understanding Your Average Daily Balance to Minimize Interest Charges

Your Average Daily Balance is a key factor in determining how much interest you pay. By making frequent payments and being mindful of your spending to keep your Average Daily Balance low, you can reduce potential interest charges.
I advise you to pay off your balance in full each month. If this is an issue, consider revising your budget to reduce reliance on credit.