Average Daily Balance

Posted by Professor Cram in Consumer Credit and Banking

Average Daily Balance

The Average Daily Balance is the total of the balance at the end of each day during a period divided by the number of days in the period.

Average Daily Balance, or ADB, is often used to calculate periodic interest charges by multiplying the periodic interest rate by the average daily balance. The most common period used for this type of calculation is monthly, which can either be a rolling 30 day period, or an actual calendar month. The most common use of Average Daily Balance for typical consumers is credit cards that calculate monthly finance charges based on the average daily balance, although some only do this if the balance from the prior month is not paid in full by the due date.

Example of Average Daily Balance

The method for finding the Average Daily Balance is illustrated in the chart below. In this example, let's assume the following:

  • Starting balance on Jan 1: $1,987.65
  • Period length: 7 days
  • Purchases:
    • Jan 2: $256.78
    • Jan 5: $ 78.99
    • Jan 7: $ 22.21
  • Payments:
    • Jan 4: $497.15
    • Jan 7: $800.00

Starting with the starting balance, add the purchases and subtract the payments for each day to find that day's balance. Be sure to include all the days in the period, even those with no transaction activity. Add these daily balances (in this case, seven of them) and divide by the number of days in the period (in this case, seven) to find the Average Daily Balance.

Date

Purchases

Payments

Balance

Jan 01     $ 1,987.65
Jan 02 $256.78   $ 2,244.43
Jan 03     $ 2,244.43
Jan 04   $497.15 $ 1,747.28
Jan 05 $ 78.99   $ 1,826.27
Jan 06     $ 1,826.27
Jan 07 $ 22.21 $800.00 $ 1,048.48
    Total of Daily Balances: $12,924.81
    Number of Days: 7
    Average Daily Balance: $1,846.40

As you can see, making payments earlier can reduce your overall Average Daily Balance. This, in turn, will reduce your interest payments.

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