Section 4.7: Average Daily Balance
- Page ID
- 216987
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The Average Daily Balance (ADB) method is the most widely used way credit card companies calculate interest on revolving balances. Under this method, interest is based on your balance each day of the billing cycle, not just the amount owed on the statement date. Every day, the lender records your current balance, and at the end of the cycle, these daily balances are added together and divided by the number of days to find the average. What many people don’t realize is that interest is calculated daily, regardless of when the payment due date falls. This means that making a payment earlier in the billing cycle immediately reduces the daily balances used in the calculation, lowering your interest. Paying later, even if it’s on or before the due date, keeps your daily balance higher for more days, increasing the interest charged. Because purchases and payments affect the balance on different days, the ADB method highlights why when you pay can be just as important as how much you pay when trying to reduce interest costs.
The formula for Average Daily Balance or ADB:
\[\text{ADB =}\frac{\text{Sum of all daily balances in the billing cycle}}{\text{Number of days in the cycle}} \nonumber \]
To calculate the Average Daily Balance or ADB:
- Step 1: Find the balance after each transaction.
- Step 2: Find the number of blocks of days for each balance and verify the sum of days in the cycle.
- Step 3: Multiply those blocked days by each respective balance.
- Step 4: Find the sum of all those products.
- Step 5: Divide the sum by the number of days in the cycle or month.
To calculate the Finance Charge (or FC for short) simply use the simple interest formula:
\[I = P\cdot r\cdot t\nonumber\]
To find the New Balance (or NB for short) for the next cycle or month by adding the finance charge to the ending balance:
\[\text{New Balance} = \text{Ending Balance}+\text{Finance Charge}\nonumber\]
Let’s look at a very straightforward example of how the Average Daily Balance (ADB) method works. Suppose your billing cycle runs from April 1st through April 30th. Here is your credit card statement
| Transaction Date | Post Date | Merchant ID / Description | +/– | Amount | Balance |
|---|---|---|---|---|---|
| Apr. 1 | Apr. 1 | Previous Balance from March | (+) | $1,000.00 | $1,000.00 |
| Apr. 14 | Apr. 16 | Payment Made (Thank you) | (–) | ($500.00) | $500.00 |
| Apr. 30 | Apr. 30 | Ending Balance for April | $500.00 |
So, first, let's understand the first two columns in the statement. The transaction date is the day you actually make a purchase, withdrawal, or payment. The post date (also called the “settlement date”) is the day your financial institution finishes processing the transaction and officially applies it to your account. For purchases, most institutions use what is called a same‑day impact or same‑day posting effect. This means that if you make a purchase on April 6th, your daily balance for April 6th increases immediately and is included in that day’s ending balance, even if the transaction doesn’t fully post until later. For payments or credits, however, many institutions do not apply the payment to your balance on the same day you make it. Instead, payments are commonly posted one or several days later. In the example above, the payment was reflected on April 16th, when it was sent electronically on April 14th. The payment does not reduce your daily balance until the day it is officially posted. Because interest under the Average Daily Balance (ADB) method is calculated using each day’s balance, this timing difference benefits the financial institution. Purchases raise your balance immediately. Payments reduce your balance only when they post. This gap results in higher daily balances, which increases the Average Daily Balance, and therefore increases the interest you are charged for the billing cycle.
Now, at the start of the cycle, your balance is exactly $1,000. You make a $500 payment on April 14th, and the credit card company posts (credits) it two days later on April 16. This means:
- For the first 15 days of the cycle (April 1–15), your balance was $1,000. Think day 1 = $1,000, day 2 = $1,000, ... , day 15 = $1,000 (15 days at $1,000 each day)
- For the last 15 days (April 16–30), your balance was $500. Think day 16 = $500, day 17 = $500, ... , day 30 = $500 (15 days at $500 each day)
To calculate the ADB, the lender uses the formula(s) above and takes the sum of all daily balances and divides by the number of days in the cycle:
\[\begin{align} \text{ADB} &= \frac{(15×$\text{1,000)}+(15×$\text{500})}{30} \nonumber\\[8pt] \text{ADB} &= \frac{($\text{15,000)} + ($\text{7,500)}}{30} \nonumber\\[8pt] \text{ADB} &= \frac{$\text{22,500}}{30} \nonumber\\ \end{align} \]
\[\boxed {\text{ADB}=$\text{750}}\nonumber \]
So your Average Daily Balance is $750, even though your balance at the end of the cycle is only $500. Most people assume interest should be based on the amount they currently owe (in this case, $500). But, with the ADB method, interest is calculated on the average of all daily balances throughout the cycle, not just the ending balance. Because the balance was higher earlier in the cycle, the interest ends up higher as well. Now imagine you waited until April 30th, the last day of the cycle, to make your $500 payment. Since your balance would have been $1,000 for all 30 days, your Average Daily Balance would be:
\[\begin{align} \text{ADB} &= \frac{(30×$\text{1,000)}}{30} \nonumber\\[8pt] \text{ADB} &= \frac{($\text{30,000)}}{30} \nonumber\\ \end{align} \]
\[\boxed {\text{ADB}=$\text{1,000}}\nonumber \]
In other words, paying on the last day does nothing to reduce the ADB, and your interest charge will be based on the full $1,000. Even though the payment due date might be April 30th, the interest calculation doesn’t care about the due date at all. Interest is calculated daily, so:
- Paying earlier reduces your ADB and lowers your interest.
- Paying later, even on time, keeps your balance higher for more days and increases interest.
- Two people who both pay $500 by the due date might be charged very different interest amounts depending on when the payment was made.
This is why the ADB system encourages earlier payments and why waiting until the due date can quietly cost you more. Of course, the credit card companies never really explains this to the consumer, because at the end of the day, they are in the business of making money. So, when most customers are not informed on how an ADB is calculated, then that is when the companies can maximize profit.
A credit card statement from February 1st to February 28th is given below. (To keep the calculations simplified, let’s assume that the payment cycle starts at the beginning of the month and ends on the last day of the month).
| Transaction Date | Post Date | Merchant ID / Description | +/– | Amount | Balance |
|---|---|---|---|---|---|
| Feb. 1 | Feb. 1 | Previous Balance from January | (+) | $1,000.00 | $1,000.00 |
| Feb. 9 | Feb. 9 | Target | (+) | $75.00 | $1,075.00 |
| Feb. 14 | Feb. 14 | Maggiano's Italian Restaurant | (+) | $125.00 | $1,200.00 |
| Feb. 24 | Feb. 26 | Payment Made (Thank you) | (–) | ($200.00) | $1,000.00 |
| Feb. 28 | Feb. 28 | Ending Balance for February | $1,000.00 | ||
| Finance Charge at APR 19.9% (based on ADB =????) | (+) | FC = ???? | NB = ???? | ||
| New Balance as of March 1st |
- Find the average daily balance.
- Find the finance charge for the month. The APR is 19.9%.
- Find the new balance on March 1st.
✅ Solution:
- Average daily balance (ADB)
It may be easier to use a table for the first four steps. Start off with a column listing the post dates and always ignore the transaction dates.
- Step 1: Find the balance after each transaction.
- Step 2: Find the number of blocks of days for each balance and verify the sum of days in the cycle.
- Step 3: Multiply those blocked days by each respective balance.
- Step 4: Find the sum of all those products.
| Post Date | Balance (Step 1) |
Days (Step 2) |
Calculations (Steps 3 & 4) |
|---|---|---|---|
| Feb. 1 | $1,000.00 | (9 – 1) = 8 | ($1,000.00)(8) = $8,000.00 |
| Feb. 9 | $1,075.00 | (14 – 9) = 5 | ($1,075.00)(5) = $5,375.00 |
| Feb. 14 | $1,200.00 | (26 – 14) = 12 | ($1,200.00)(12) = $14,000.00 |
| Feb. 26 | $1,000.00 | (28 – 26) + 1* = 3 | ($1,000.00)(3) = $3,000.00 |
| 30 ✔ | Sum = $30,375.00 |
*(Look at the number of days until the end of the month: Feb. 26 to Feb. 28. If you just went ahead with 28 – 26 = 2, then, the last day of the month is not included, so you need to add 1 to account for that last day: 28 – 26 + 1 = 3. Think February 26th, 27th, & 28th.
- Step 5: Divide the sum by the number of days in the cycle or month.
\[\begin{align} \text{ADB} &= \frac{$\text{30,375.00}}{28} \nonumber\\[8pt] \text{ADB} &= $\text{1,084.8214285714} \nonumber\\[8pt] \end{align} \]
\[\boxed {\text{ADB}=$\text{1,084.82}}\nonumber \]
To perhaps clear up how the days work, here are the blocks of days for each respective balance:
- Block 1 @ $1,000: February 1st, 2nd, 3rd, 4th, 5th, 6th, 7th, 8th (8 total days)
- Block 2 @ $1,075: February 9th, 10th, 11th, 12th, 13th (5 total days)
- Block 3 @ $1,200: February 14th, 15th, 16th, 17th, 18th, 19th, 20th, 21st, 22nd, 23rd, 24th, 25th (12 total days)
- Block 4 @ $1,000: February 26th, 27th, 28th (3 total days)
The number of days match; 8 + 5 + 12 + 3 = 28 days and February has 28 days.
Here is what the ADB looks like using an equation format:
\[\text{ADB =}\frac{\text{Sum of all daily balances in the billing cycle}}{\text{Number of days in the cycle}} \nonumber \]
\[\begin{align} \text{ADB} &= \frac{(8×$\text{1,000.00)}+(5×$\text{1,075.00})+(12×$\text{1,200.00})+(3×$\text{1,000.00})}{28} \nonumber\\[8pt] \text{ADB} &= \frac{($\text{8,000.00)} + ($\text{5,375.00)} + ($\text{14,000.00)} + ($\text{3,000.00)}}{28} \nonumber\\[8pt] \text{ADB} &= \frac{$\text{30,375.00}}{28} \nonumber\\[8pt] \text{ADB} &= $\text{1,084.8214285714} \nonumber\\[8pt] \end{align} \]
\[\boxed {\text{ADB}=$\text{1,084.82}}\nonumber \]
- Finance Charge
\[I=P\cdot r\cdot t\nonumber \]
We know that \(P=$\text{1,000.00};~r=0.199;~t=\frac{1}{12}\), so
\[\begin{align} I &= ($\text{1,084.82})\cdot(0.199)\cdot\left(\frac{1}{12}\right)\nonumber\\[8pt] I &= $\text{17.989931666667} \nonumber\\[8pt] \end{align}\]
\[\boxed {\text{Finance Charge}=$\text{17.99}}\nonumber \]
- New Balance
\[\begin{align} \text{New Balance} &= \text{Ending Balance}+\text{Finance Charge}\nonumber\\[4pt] \text{New Balance} &= ($\text{1,000.00})+($\text{17.99}) \nonumber\\[4pt] \end{align}\]
\[\boxed {\text{New Balance}=$\text{1,017.99}}\nonumber \]
So, now the statement would have the missing information filled in for the ADB, finance charge, and the new balance.
| Transaction Date | Post Date | Merchant ID / Description | +/– | Amount | Balance |
|---|---|---|---|---|---|
| Feb. 1 | Feb. 1 | Previous Balance from January | (+) | $1,000.00 | $1,000.00 |
| Feb. 9 | Feb. 9 | Target | (+) | $75.00 | $1,075.00 |
| Feb. 14 | Feb. 14 | Maggiano's Italian Restaurant | (+) | $125.00 | $1,200.00 |
| Feb. 24 | Feb. 26 | Payment Made (Thank you) | (–) | ($200.00) | $1,000.00 |
| Feb. 28 | Feb. 28 | Ending Balance for February | $1,000.00 | ||
| Finance Charge at APR 19.9% (based on ADB =$1,084.82) | (+) | $17.99 | $1,017.99 | ||
| New Balance as of March 1st |
Kamal's VISA credit card statement along with the transactions from May 1st to May 31st is given below. (Assume that the payment cycle starts at the beginning of the month and ends on the last day of the month).
| Transaction Date | Post Date | Merchant ID / Description | +/– | Amount | Balance |
|---|---|---|---|---|---|
| May 1 | May 1 | Previous Balance from April | (+) | $4,352.79 | $4,352.79 |
| May 3 | May 3 | Walmart | (+) | $62.34 | $4,415.13 |
| May 6 | May 6 | Amazon Shopping | (+) | $19.99 | $4,435.12 |
| May 8 | May 10 | VANS Shoes - RETURN/CREDIT | (–) | ($53.86) | $4,381.26 |
| May 20 | May 20 | Del Taco | (+) | $14.13 | $4,395.39 |
| May 27 | May 30 | Payment Made (Thank you) | (–) | ($4000.00) | $395.39 |
| May 31 | May 31 | Ending Balance for May | $395.39 | ||
| Finance Charge at APR 22.99% (based on ADB =????) | (+) | FC = ???? | NB = ???? | ||
| New Balance as of June 1st | NB = ???? |
- Find the average daily balance.
- Find the finance charge for the month. The APR is 22.99%.
- Find the new balance on June 1st.
✅ Solution:
- Average daily balance (ADB)
Use a table for the first four steps. Start off with a column listing the post dates and always ignore the transaction dates.
- Step 1: Find the balance after each transaction.
- Step 2: Find the number of blocks of days for each balance and verify the sum of days in the cycle.
- Step 3: Multiply those blocked days by each respective balance.
- Step 4: Find the sum of all those products.
| Post Date | Balance (Step 1) |
Days (Step 2) |
Calculations (Steps 3 & 4) |
|---|---|---|---|
| May 1 | $4,352.79 | (3 – 1) = 2 | ($4,352.79)(2) = $8,705.58 |
| May 3 | $4,415.13 | (6 – 3) = 3 | ($4,415.13)(3) = $13,245.39 |
| May 6 | $4,435.12 | (10 – 6) = 4 | ($4,435.12)(4) = $17,740.48 |
| May 10 | $4,381.26 | (20 – 10) = 10 | ($4,381.26)(10) = $43,812.60 |
| May 20 | $4,395.39 | (30 – 20) = 10 | ($4,395.39)(10) = $43,953.90 |
| May 30 | $395.39 | (31 – 30) + 1* = 2 | ($395.39)(2) = $790.78 |
| 31 ✔ | Sum = $128,248.73 |
*(Look at the number of days until the end of the month: May 30 to May 31. If you just went ahead with 31 – 30 = 1, then, the last day of the month is not included, so you need to add 1 to account for that last day: 31 – 30 + 1 = 2. Think May 30th & 31st.
- Step 5: Divide the sum by the number of days in the cycle or month.
\[\begin{align} \text{ADB} &= \frac{$\text{128,248.73}}{31} \nonumber\\[8pt] \text{ADB} &= $\text{4,137.055804516} \nonumber\\[8pt] \end{align} \]
\[\boxed {\text{ADB}=$\text{4,137.06}}\nonumber \]
To perhaps clear up how the days work, here are the blocks of days for each respective balance:
- Block 1 @ $4,352.79: May 1st, 2nd (2 total days)
- Block 2 @ $4,415.13: May 3rd, 4th, 5th (3 total days)
- Block 3 @ $4,435.12: May 6th, 7th, 8th, 9th, (4 total days)
- Block 4 @ $4,381.26: May 10th, 11th, 12th, 13th, 14th, 15th, 16th, 17th, 18th, 19th (10 total days)
- Block 5 @ $4,395.39: May 20th, 21st, 22nd, 23rd, 24th, 25th, 26th, 27th, 28th, 29th (10 total days)
- Block 6 @ $395.39: May 30th, 31st (2 total days)
The number of days match; 2 + 3 + 4 + 10 + 10 + 2 = 31 days and May has 31 days.
Here is what the ADB looks like using an equation format:
\[\text{ADB =}\frac{\text{Sum of all daily balances in the billing cycle}}{\text{Number of days in the cycle}} \nonumber \]
\[\begin{align} \text{ADB} &= \frac{(2×$\text{4,352.79)} + (3×$\text{4,415.13}) + (4×$\text{4,435.12}) + (10×$\text{4,381.26}) + (10×$\text{4,395.39}) + (2×$\text{395.39})}{31} \nonumber\\[8pt] \text{ADB} &= \frac{($\text{8,705.58)} + ($\text{13,245.39)} + ($\text{17,740.48)} + ($\text{43,812.60)} + ($\text{43,953.90)} + ($\text{790.78)}}{31} \nonumber\\[8pt] \text{ADB} &= \frac{$\text{128,248.73}}{31} \nonumber\\[8pt] \text{ADB} &= $\text{4,137.055804516} \nonumber\\[8pt] \end{align} \]
\[\boxed {\text{ADB}=$\text{4,137.06}}\nonumber \]
- Finance Charge
\[I=P\cdot r\cdot t\nonumber \]
We know that \(P=$\text{4,137.06};~r=0.2299;~t=\frac{1}{12}\), so
\[\begin{align} I &= ($\text{4,137.06})\cdot(0.2299)\cdot\left(\frac{1}{12}\right)\nonumber\\[8pt] I &= $\text{79.2591745} \nonumber\\[8pt] \end{align}\]
\[\boxed {\text{Finance Charge}=$\text{79.26}}\nonumber \]
- New Balance
\[\begin{align} \text{New Balance} &= \text{Ending Balance}+\text{Finance Charge}\nonumber\\[4pt] \text{New Balance} &= ($\text{395.39})+($\text{79.26}) \nonumber\\[4pt] \end{align}\]
\[\boxed {\text{New Balance}=$\text{474.65}}\nonumber \]
Julie's Discover credit card statement from November 1st to November 30th is given below. (Assume that the payment cycle starts at the beginning of the month and ends on the last day of the month).
| Transaction Date | Post Date | Merchant ID / Description | +/– | Amount | Balance |
|---|---|---|---|---|---|
| Nov. 1 | Nov. 1 | Previous Balance from October | (+) | $2,618.02 | $2,618.02 |
| Nov. 2 | Nov. 4 | Payment Made (Thank you) | (–) | ($2,000.00) | $618.02 |
| Nov. 25 | Nov. 25 | Hot Topic | (+) | $23.54 | $641.56 |
| Nov. 26 | Nov. 26 | NETFLIX | (+) | $26.93 | $668.49 |
| Nov. 27 | Nov. 27 | Regal Cinema | (+) | $34.00 | $702.49 |
| Nov. 30 | Nov. 30 | Ending Balance for November | $702.49 | ||
| Finance Charge at APR 17.99% (based on ADB =????) | (+) | FC = ???? | NB = ???? | ||
| New Balance as of December 1st |
- Find the average daily balance.
- Find the finance charge for the month. The APR is 17.99%.
- Find the new balance on December 1st.
✅ Solution:
- Average daily balance (ADB)
Use a table for the first four steps. Start off with a column listing the post dates and always ignore the transaction dates.
- Step 1: Find the balance after each transaction.
- Step 2: Find the number of blocks of days for each balance and verify the sum of days in the cycle.
- Step 3: Multiply those blocked days by each respective balance.
- Step 4: Find the sum of all those products.
| Post Date | Balance (Step 1) |
Days (Step 2) |
Calculations (Steps 3 & 4) |
|---|---|---|---|
| Nov. 1 | $2,618.02 | (4 – 1) = 3 | ($2,618.02)(3) = $7,854.06 |
| Nov. 4 | $618.02 | (25 – 4) = 21 | ($618.02)(21) = $12,978.42 |
| Nov. 25 | $641.56 | (26 – 25) = 1 | ($641.56)(1) = $641.56 |
| Nov. 26 | $668.49 | (27 – 26) = 1 | ($668.49)(1) = $668.49 |
| Nov. 27 | $702.49 | (30 – 27) + 1* = 4 | ($702.49)(4) = $2,809.96 |
| 30 ✔ | Sum = $24,952.49 |
*(Look at the number of days until the end of the month: Nov. 27 to Nov. 30. If you just went ahead with 30 – 27 = 3, then, the last day of the month is not included, so you need to add 1 to account for that last day: 30 – 27 + 1 = 4. Think Nov. 27th, 28th, 29th & 30th.
- Step 5: Divide the sum by the number of days in the cycle or month.
\[\begin{align} \text{ADB} &= \frac{$\text{24,952.49}}{30} \nonumber\\[8pt] \text{ADB} &= $\text{831.74966666667} \nonumber\\[8pt] \end{align} \]
\[\boxed {\text{ADB}=$\text{831.75}}\nonumber \]
To perhaps clear up how the days work, here are the blocks of days for each respective balance:
- Block 1 @ $2,618.02: Nov. 1st, 2nd, 3rd (3 total days)
- Block 2 @ $618.02: Nov. 4th, 5th ,6th, 7th, 8th, 9th, 10th, 11th, 12th, 13th, 14th, 15th, 16th, 17th, 18th, 19th, 20th, 21th, 22th, 23th, 24th, (21 total days)
- Block 3 @ $641.56: Nov. 25th (1 total day)
- Block 4 @ $668.49: Nov. 26th (1 total day)
- Block 5 @ $702.49: Nov. 27th, 28th, 29th, 30th (4 total days)
The number of days match; 3 + 21 + 1 + 1 + 4 = 30 days and November has 30 days.
Here is what the ADB looks like using an equation format:
\[\text{ADB =}\frac{\text{Sum of all daily balances in the billing cycle}}{\text{Number of days in the cycle}} \nonumber \]
\[\begin{align} \text{ADB} &= \frac{(3×$\text{2,618.02)} + (21×$\text{618.02}) + (1×$\text{641.56}) + (1×$\text{668.49}) + (4×$\text{702.49})}{30} \nonumber\\[8pt] \text{ADB} &= \frac{($\text{7,854.06)} + ($\text{12,978.42)} + ($\text{641.56)} + ($\text{668.49)} + ($\text{2,809.96)}}{30} \nonumber\\[8pt] \text{ADB} &= \frac{$\text{24,952.49}}{30} \nonumber\\[8pt] \text{ADB} &= $\text{831.74966666667} \nonumber\\[8pt] \end{align} \]
\[\boxed {\text{ADB}=$\text{831.75}}\nonumber \]
- Finance Charge
\[I=P\cdot r\cdot t\nonumber \]
We know that \(P=$\text{831.75};~r=0.1799;~t=\frac{1}{12}\), so
\[\begin{align} I &= ($\text{831.75})\cdot(0.1799)\cdot\left(\frac{1}{12}\right)\nonumber\\[8pt] I &= $\text{12.46931875} \nonumber\\[8pt] \end{align}\]
\[\boxed {\text{Finance Charge}=$\text{12.47}}\nonumber \]
- New Balance
\[\begin{align} \text{New Balance} &= \text{Ending Balance}+\text{Finance Charge}\nonumber\\[4pt] \text{New Balance} &= ($\text{702.49})+($\text{12.47}) \nonumber\\[4pt] \end{align}\]
\[\boxed {\text{New Balance}=$\text{714.96}}\nonumber \]
In comparing these two credit‑card statements for Example #4.7.2 and Example #4.7.3, the impact of payment timing becomes very clear. Kamal’s $4,000 payment was posted at the end of the billing cycle, so his balance remained above $4,300 for almost the entire month. As a result, his average daily balance (ADB) stayed extremely high at $4,137.06, leading to a finance charge of $79.26.
By contrast, Julie’s $2,000 payment was posted very early in the month, dramatically reducing her balance for nearly the full billing cycle. Her ADB fell to $831.75, and her finance charge was only $12.47. Even though her ending balance was still $702.49 and Kamal's was much lower at $395.39, the earlier payment in the cycle saved her more than $60 in finance charges compared to Kamal.
This side‑by‑side comparison demonstrates why making larger payments earlier in the cycle is so powerful. It lowers your balance for more days of the month, reduces the ADB, and significantly cuts the finance charge. Over time, these savings add up and make a major difference in how quickly a debt is paid down.
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Patrick’s credit card statement from June 1st to June 30th is given below. (To keep the calculations simplified, let’s assume that the payment cycle starts at the beginning of the month and ends on the last day of the month).
Transaction Date Post Date Merchant ID / Description +/– Amount Balance Jun. 1 Jun. 1 Previous Balance from May $484.53 $484.53 Jun. 8 Jun. 8 Albertsons (+) $52.51 $537.04 Jun. 13 Jun. 13 Kroger (+) $63.79 $600.83 Jun. 21 Jun. 21 Payment Made (Thank you) (–) ($300.00) $300.83 Jun. 24 Jun. 24 Vons (+) $74.04 $374.87 Jun. 30 Jun. 30 Ending Balance for June $374.87 Finance Charge at APR 24.00% (based on ADB =????) (+) FC = ???? NB = ???? New Balance as of July 1st - Find the average daily balance.
- Find the finance charge for the month. The APR is 24.00%.
- Find the new balance on July 1st.
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Karina's MasterCard credit card statement from January 1st to January 31st is given below. (Assume that the payment cycle starts at the beginning of the month and ends on the last day of the month).
Transaction Date Post Date Merchant ID / Description +/– Amount Balance Jan. 1 Jan. 1 Previous Balance from December (+) $784.51 $784.51 Jan. 3 Jan. 3 Regal Cinema (+) $68.79 $853.30 Jan. 11 Jan. 11 Hot Topic (+) $218.11 $1,071.41 Jan. 26 Jan. 28 Payment Made (Thank you) (–) ($800.00) $271.41 Jan. 31 Jan. 31 Ending Balance for November $271.41 Finance Charge at APR 18.00% (based on ADB =????) (+) FC = ???? NB = ???? New Balance as of Feb. 1st - Find the average daily balance.
- Find the finance charge for the month. The APR is 18.00%.
- Find the new balance on February 1st.
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Let’s take a look at Exercise #2 and see what happens if the payment of $800 was made much earlier in the payment cycle. So, instead of the $800 payment being made on January 28th, we will make it on January 5th, and see how much of an impact that makes, keeping everything else the same with regards to purchases. (Again, assume that the payment cycle starts at the beginning of the month and ends on the last day of the month).
Transaction Date Post Date Merchant ID / Description +/– Amount Balance Jan. 1 Jan. 1 Previous Balance from December (+) $784.51 $784.51 Jan. 3 Jan. 3 Regal Cinema (+) $68.79 $853.30 Jan. 3 Jan. 5 Payment Made (Thank you) (–) ($800.00) $53.30 Jan. 11 Jan. 11 Hot Topic (+) $218.11 $271.41 Jan. 31 Jan. 31 Ending Balance for November $271.41 Finance Charge at APR 18.00% (based on ADB =????) (+) FC = ???? NB = ???? New Balance as of Februray 1st - Find the average daily balance.
- Find the finance charge for the month. The APR is 18.00%.
- Find the new balance on February 1st.
- Compare the results for both Exercise #2 and Exercise #3.
- Answers
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- a) ADB = $480.34; b) FC = $9.61; c) NB = $384.48.
- a) ADB = $893.39; b) FC = $13.40; c) NB = $284.81.
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- ADB = $299.84;
- FC = $4.50;
- NB = $275.91;
- When the large payment is made earlier in the billing cycle, the Average Daily Balance (ADB) drops dramatically. In this case, from $893.39 down to $299.84. Notice that the ending balance is identical in both scenarios ($271.41), yet the timing of the payment makes a major difference. Because the ADB is so much lower, the finance charge also falls sharply from $13.40 to $4.50, a savings of $8.90 for the month. This happens entirely because the payment was applied 23 days earlier, reducing the balance for most of the billing cycle. This comparison shows why making larger payments earlier in the cycle is so beneficial. The earlier the payment is posted, the longer your balance stays lower and the more your finance charges shrink. Over time, especially with large balances, this strategy makes a much bigger impact and helps you pay off debt faster and cheaper.