How do banks calculate average daily balance for credit cards?
Average daily balance is calculated using total daily balance in the month dividing by the number of days in the month. So for a 30 day month if you had Rs. 2000 for 10 days and then made a
purchase of Rs. 1500 and had a balance of Rs. 500 for the remaining 20 days,
your average daily balance will be: (200010) + (50020)/30= 1000
The key to bringing down or even eradicating your Credit Card interest rates is to recognize how it is computed. Credit Cards levy interest on the basis of your average balance. As the billing period comes to an end, the card user’s overall outstanding amount on each day are counted and then divided by the number of days in the said period. For instance, if you use INR 100 on the initial day of say, one-month period, then your daily balance could be roughly the same (i.e. INR 100). But if you swipe for the same amount on the final day of the billing period, you will be charged only INR 3.33 (100 divided by 30). Ahem, don’t be fooled by this small number. Interest is usually compounded and may add up to a big amount.
Although Credit Cards compute interest on each charge on a daily basis, almost every provider offers to waive off the charges if the customer settles their net balance once and for all, especially before the stipulated date. This duration between the due date and the end of the billing cycle is called the grace period. And that is an excellent chance to sidestep monstrous interest rates. Basically, it is like getting a loan totally free of interest. However, if the card user is not able to shell out the due amount (i.e. even a small balance) before the deadline, the grace period and its benefits no longer apply to him/ her. Not only will customers be obliged to pay interest on each of their charges in their recent statement cycle, but they will also start to pay interest on these charges in the next cycle too. Vicious cycle indeed! In simple words, clear away everything before the month ends to lead an interest-free life.
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