# Financial Math: Average Daily Balance Method for charging interest on open end credit (credit cards)

Hi i’m miss hearne let’s get started in this video we’re gonna talk about the average daily balance method which is the common method used by for example credit cards to calculate your finance charge or interest for the month so here we go at the beginning of a 31-day billing period sandra lazaro has an unpaid balance of seven hundred eighty dollars on her credit

Card three days before the end of the billing period she pays \$400 find her finance charge at three point two percent per month using the average daily balance method okay so a couple of things the billing period is normally a month so that’s either gonna be 30 or 31 days sometimes they’ll just tell us which month like march and we’re expected to know how many days

That is but in this case they’re actually telling us it’s a 31-day billing period the unpaid balance is referring to how much she didn’t pay off the previous month that rolled over onto the next month so the finance charge is calculated by multiplying the monthly interest rate times what’s called the average daily balance and the way that you get the average daily

Balance is you add up all the daily balances and divide by the number of days to get the average that would be a lot of adding if you think about it’s a thirty one day billing period and she has except for three days so 31 minus three is for 28 days she has a balance of 780 so we could add up 780 28 times but isn’t it easier to multiply so what’s usually the easiest