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

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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

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Thing to do is to make a little chart and list the number of days that you have a particular balance so in this case again she had a thirty one day billing period and except for the last three days she had a balance of 780 so for 28 days she had a balance of 780 but then for three days she had something less right she made a $400 payment so instead of having a 780

Dollar balance 780 minus 400 is 380 so for those three days she had a balance of $380 all right so again instead of adding up 28 times 780 we’re gonna multiply the days times the balance and the same thing for the three days where she has a balance of 380 so let’s see we’re going to have 28 times 780 is 20 1840 and then we’re going to have 3 times 380 is going to

Be 1140 but we want the total of all the days so let’s add those together so we get 20 2,980 and that is the sum of your daily balances if you added up each of the days we would get that we want to divide that by the number of days so divided by 31 and that gives us 740 $1.29 so this is how much on average she had each day in the account notice it’s a little less

Than 780 because at the end she did make a payment and so that’s what we charged the interest on so we’re gonna take our monthly interest rate which is 3.2 percent in decimal form so move that decimal two places to the left and we get 0.03 2 and then we’re gonna multiply that times the average daily balance 740 129 740 1.29 times 0.03 2 is about 23 dollars and 72

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Cents that’s how much she’s going to be charged for borrowing that money for the month i hope you found this video helpful if you did please remember to give it a thumbs up that helps other students to find the video you can also subscribe to miss earn mathematics for more math videos

Transcribed from video
Financial Math: Average Daily Balance Method for charging interest on open end credit (credit cards) By Ms. Hearn