How is the Average Daily Balance calculated?

The Average Daily Balance is calculated by dividing the balance outstanding at the close of each day by the number of days in the billing cycle. This method takes into account each day's balance, which provides a comprehensive view of how the account was utilized throughout the billing period. By considering the daily closing balance, it accurately reflects the use of credit or the amount owed over time, leading to a more precise calculation that can influence interest charges or fees associated with the balance.

This methodology contrasts starkly with other approaches. For instance, summing the highest and lowest balances or focusing solely on high balances would not capture the full fluctuations and averages of the account over time. Additionally, dividing the total amount of sales by the number of transactions does not pertain to calculating balance but rather relates to transaction activity. By using the cumulative balance approached daily, this method ensures a fair representation of the average balance across the billing cycle.