average daily balance

Dictionary of Banking Terms for: average daily balance
average daily balance
  1. average amount in a deposit account, equal to the sum of daily deposit balances during an accounting period, usually a month, divided by the number of days.
  2. method of computing credit card finance charges, computed by taking the daily beginning balance, adding new charges for that day, and subtracting any payments applied to purchases. The resulting total, divided by the number of days in the billing period, is multiplied by the finance charge.
Dictionary of Finance and Investment Terms for: average daily balance
average daily balance

method for computing interest or finance charges on bank deposit accounts, credit cards, and charge accounts. Deposit accounts use the daily closing balance divided by the number of days in the period and apply the interest rate to that. Credit and charge cards divide the balances owed each day by the number of days and apply the finance charge. The average daily balance method, widely used by department stores, is less favorable to the consumer than the adjusted balance method used for interest earned on bank deposit accounts but more favorable than the previous balance method used by most credit cards.

Copyright (c) by Barron's Educational Series. Reprinted by arrangement with the publisher of this site.