Methods for Calculating the Daily Balance of Finance Charges

There are many methods used by credit card companies to calculate the monthly Finance Charges. The daily balance method is one of them.  The daily balance method of the financial charge calculation uses the actual balance on each day of the settlement cycle instead of the average balance in the entire settlement cycle. The finance costs are calculated by adding a daily balance multiplied by the daily rate, which is 1/365 RAP. Otherwise, the daily rate is the annual interest rate divided by 365.

Below is a way in which the calculations are made using the daily balance method. Let’s assume that you have the same balance every day of the billing cycle.

Methods for Calculating the Daily Balance of Finance Charges

APR = 14%

daily rate = 0.0385%

days in the billing cycle = 30

daily balance = 1000 USD

financing cost = (daily balance 1 * daily rate) + … + (30 days * daily rate)

= (1000 $ x .000385) +  (1000 $ * .00385)

= $11.55

The impact on payments | Methods for Calculating the Daily Balance of Finance Charges

Thanks to the daily balance method, the payment and valuation schedule is the difference in the charge rate. Consider the same APR, daily date and days of the billing cycle mentioned above. If you deposit $ 100 on the fifth day of the billing cycle, your funding rate will be $ 10.55. if you deposit $100 on the 25th day of your billing cycle, your funding rate will be $ 11.32. When you make payments at the beginning of the billing cycle it means that you have a lower balance for a few days of the billing cycle. This translates into a reduction in financial charges.

Let us assume you make a payment ($ 100) and a toll ($ 75) during the same billing cycle. See how each calendar affects the funding rate:

Payment 5, payment 25, financial fee =$10.69

Payments of the fifth and sixth tariffs, financial costs =$ 11.27

Payment 25, payment 5, funding rate = $12.11

Payments in 24, payment in 25, financing fee =$ 11.46

So payments at the beginning of the billing cycle and fees in the next billing cycle cause a lower financial burden when the credit card uses the daily balance method to calculate financial costs. Charges at the beginning of the billing cycle and subsequent payment in the billing cycle cause the highest financial burdens. It would be important to track payments and fees if you want to reduce the amount of interest paid on your credit card account.  The day of the billing cycle may not coincide with the calendar month. This is because the billing cycles do not necessarily start on the first day of the month, they are usually shorter than a month.

Methods for Calculating the Daily Balance of Finance Charges