Understanding the Mathematics of Personal Finance

DAILY BALANCE

The daily balances of your purchases and/or cash advances are the amounts on which finance charges are calculated. To understand the details of the finance charge calculation, you first need to understand the calculation of the daily balances for each of the days in the billing period (usually a month). Note that there are two separate balances: one for purchases and one for cash advances.

To calculate a day’s daily balances,

1. start with the previous day’s daily balances;

2. add transactions and fees charged that day (to the appropriate balance);

3. add finance charges accrued on previous day’s daily balance when appropriate;

4. subtract any credits and payments applied that day against the balances. Remember to apply as much of the payment as possible to the lower interest balance (typically the purchase balance).