## What Is The Difference Between Unpaid Balance And Average Balance?

Two methods of calculating interest on a credit card statement are generally in use: the unpaid balance method and the average daily balance method. To look at the difference between the unpaid balance method and the average balance method, let’s look at the credit card statement below. In this statement, the average daily balance method is used to calculate the interest.

If you calculate with the average balance method, it looks like this. You can click on this to make it larger.

Here is how interest is calculated via the unpaid balance method. I noticed that I got a different number for the new balance in the two different classes. I think one of you gave me a bogus number somewhere. This picture is from the MW class and Jim in the TTh class came up with 2149.86. The key is to make sure you add and subtract the numbers appropriately to get the new balance. You can click on this to make it larger.

Notice that these look very similar…only how the balance is calculated is different. Once you get that balance, the interest is calculated with I = P r t.

## How Does Add On Interest Work?

When you have an add-on loan, the interest on the loan is a percentage of the original amount. Payments are calculated on the loan amount plus the interest (add-on!)

Let’s look at an example. 