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Average Daily Balance

Average Daily Balance is the average amount that exists in an account over a period of time. It is calculated by adding the daily balances of a particular period and it is divided by the number of days. It is a method used for determining interest.

Average daily balance = Daily balances/Number of days

The period of calculation is usually on a monthly basis, which is either a rolling 30 day period, or an actual calendar month. The most common for typical consumers are credit cards that calculate monthly finance charges based on the average daily balance.

The average daily balance method is one of the ways that the finance charge on the credit card may be calculated. The credit card company issuer divides the balance one owes each day by the number of days in the billing cycle and multiplies the result by the interest rate to find the finance charge for each day in the period. The larger the payment one makes and the earlier in the cycle you make it, the smaller the finance charge will be. Interest payable is calculated on a daily basis, this results in less interest payable because payments on the card lower the interest payable immediately. The interest rate on department store credit cards is usually higher than normal credit cards, so this isn't to say that there is a huge interest savings.

Let us take an example. If the daily balance= Rs.100 and billing period= 30 days then the average daily balance is calculated as: 100/30= Rs. 3.33

Average daily balance can also be used to calculate on a bi-monthly or yearly basis. Credit card companies use a method called double-cycle billing. Under this method the interest rate is calculated on the previous two months average daily balance

Questions

• What is average daily balance?
• How is it calculated and who it most useful to?
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