How is the average daily balance calculated?

The average daily balance is calculated by taking the sum of the outstanding balances over a set period (typically the billing cycle) and dividing that total by the number of days in that billing cycle. This method ensures that the average reflects each day's balance, allowing for precise determination of the fees and interest charges based on the actual daily balances held during the cycle.

Other methods of calculating balances, such as using the highest or lowest balance or averaging transaction totals, do not accurately reflect the reality of daily usage and can lead to a misrepresentation of average debt incurred. By focusing on daily outstanding balances, this approach provides a more accurate picture of the financial obligations throughout the entire billing period.