Average Daily Balance
The method credit card issuers use to calculate interest, averaging the balance across each day of the billing cycle.
What is Average Daily Balance?
The average daily balance (ADB) method is the most common approach credit card issuers use to calculate the interest charge for a billing cycle. It works by adding up the cardholder's balance at the end of each day in the billing period and dividing by the number of days in that period. The resulting average is then multiplied by the card's daily periodic rate (APR ÷ 365) and the number of days in the billing cycle to produce the interest charge. New purchases may or may not be included in the ADB calculation depending on the card's terms; interest-free grace periods apply only when the prior balance was paid in full.
Example
A cardholder starts a 30-day billing cycle with a $1,000 balance, makes a $500 purchase on day 15, and makes no payments. Their ADB = ($1,000 × 15 + $1,500 × 15) ÷ 30 = $1,250. At a 24% APR (daily rate: 0.0658%), the interest charge is $1,250 × 0.000658 × 30 ≈ $24.68 for the billing cycle.
Source: Consumer Financial Protection Bureau — Credit Card Interest