Average daily balance

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Average daily balance

A method for calculating interest in which the balance owed each day by a customer is divided by the number of days. See also: Adjusted balance method and previous balance method.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Average Daily Balance

An accounting method in which cost and interest owed on a good or service are calculated at the end of each day rather than at the end of the month. Most credit cards calculate cost and interest on top of the balance at the previous pay period, but most department store cards use the average daily balance method. This, theoretically, reduces the amount one owes in interest on department store credit cards (though many charge higher rates of interest, canceling out the savings).
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Average daily balance.

The average daily balance method is one of the ways that the finance charge on your credit card may be calculated.

The credit card company issuer divides the balance you owe each day by the number of days in your billing cycle and multiplies the result by the interest rate to find the finance charge for each day in the period.

If this is the method your creditor uses, the larger the payment you make and the earlier in the cycle you make it, the smaller your finance charge will be.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.