What does the daily balance method calculate interest based on?

The daily balance method calculates interest based on the full amount of principal for each day the minimum balance requirement is met. This method entails assessing the balance each day the account is in a particular state, and interest is computed daily on the principal amount that is available in the account. If the account meets the minimum balance, it will earn interest based on the entire amount, ensuring that the interest accrues accurately reflecting the account's balance over time.

This method is popular for its precision, as it considers the actual daily transactions, allowing for fluctuations in the account balance to impact the interest earned. As a result, the accuracy of interest calculations is improved compared to methods that may use averages or other less precise measures. This direct connection between the daily principal balance and the interest accrued makes the daily balance method a preferred choice in various financial contexts.