Have you guys ever wondered how interest is calculated on various accounts such as your savings, or mortgage, or even the dreaded credit card debt? Most are calculated daily, paid monthly (occasionally quarterly), but what number do they use for the daily calculation?
I was thinking there would be these likely scenarios:
Scenario 1: Bank takes the lowest balance of the day, and uses that to calculate the interest bearing for the day. I think this would be used for savings accounts as it would benefit the bank in providing minimal interest.
An extreme example is that you continuously transfer the full amount of your savings account to your transaction account, then put it back in 1 second after. If you do this for a month, you will effectively get $0 interest for the month.
Scenario 2: Banks take the higher balance of the day, and used that to calculate the interest bearing for the day. I think this would be used for all credit accounts, such as credit cards and mortgages as it would benefit the banks in more interest receivables.
Scenario 3: Banks take the weighted average balance of the day. This would be the most fair, but it means it takes into account the intergral of balance in respects to time. If you take your money out and put it back in immediately, the change would be somewhat negligible.
Scenario 4: Banks take a snapshot average balance of the day, such as averaging a snapshot of the balance every hour. Similar to the previous scenario, but requires less computation.
Do you guys know what banks actually use? Or even better suggest another hypothetical?
You missed the scenario where it is whatever the balance is at a set time. ie the balance as at 5pm each day.