How Your Credit Card Interest is Calculated

Ever wondered why your credit card bill feels higher than expected — even after making a payment? The answer often lies in how banks calculate your interest using something called the Average Daily Balance (ADB) method. It’s a quiet math game happening in the background, affecting how fast your debt grows — even if you’ve made a partial payment.

Whether you're trying to get out of debt or just curious about how the system works, understanding ADB can help you make smarter financial moves, avoid hidden costs, and finally take control of your credit. Let’s break it down — simply, clearly, and with Canadian realities in mind.

What Is the Average Daily Balance?

It's the sum of your balance each day in the billing cycle, divided by the number of days in the cycle.

Step-by-Step Example

Let’s walk through a 30-day cycle with a few transactions:

Day of Cycle	Balance Change	New Balance
Day 1	Opening balance $2,000	$2,000
Day 10	Payment of $1,000	$1,000
Day 20	New purchase of $300	$1,300

Breakdown by Date Range

Days	Balance	Total for That Period
Day 1–9 (9 days)	$2,000	9 × $2,000 = $18,000
Day 10–19 (10 days)	$1,000	10 × $1,000 = $10,000
Day 20–30 (11 days)	$1,300	11 × $1,300 = $14,300

Simple or Compound Interest?

As if this interst charge was not enough headache for consumers already, some banks may proceed to charge interest on the initial interest after adding it to your original balance.

ADB-Only (Simple Interest, No Compounding)

• Daily Interest: $1,000 × 0.000548 = $0.548

• Total for 30 Days: $0.548 × 30 = $16.44

ADB + Daily Compounding (Actual Credit Card Method)

Let’s compute a few days manually, then estimate the 30-day balance:

• Day 1: $1,000 + $0.55 = $1,000.55

• Day 2: $1,000.55 + $0.55 = $1,001.10

• ...

• Day 30: $1016.01 + $0.56 = $1,016.72

Interest Charged: ~$16.72

This is slightly higher than $16.44 because of daily compounding.

How to Avoid or Reduce Credit Card Interest Charges

1. Pay your full statement balance by the due date.

2. Avoid using your credit card for cash advances.

3. Use automatic payments to avoid missed payments.

4. Read your monthly statement and credit agreement closely.

5. If carrying a balance, consider a low-interest card or a structured repayment plan.

Need help developing a debt repayment strategy or optimizing your credit profile? Let’s talk. I help clients across Canada build sustainable financial plans rooted in clarity and confidence.

Sources: https://www.rbcroyalbank.com/credit-cards/understanding-credit-card-interest.html, Scotiabank, CIBC, https://www.td.com/ca/en/personal-banking/products/credit-cards/understanding-credit-cards, https://globalnews.ca/news/6451352/td-credit-cards-compound-interest/, https://creditcardgenius.ca/blog/how-credit-card-interest-works-in-canada