What is 'Average Balance'

The average balance is the account balance calculated over a chosen period of time based upon multiple closing balances over that period of time. Averages are most commonly calculated on a daily or monthly basis. An average daily balance adds the closing balances at the end of each day in a given period of time and divides the sum by the number of calendar days in that period. An average monthly balance sums the closing balance at the end of each day and divides it by the number of calendar days in the month. A simple average balance between a beginning and ending date is calculated by dividing the beginning balance plus the ending balance by two. 

BREAKING DOWN 'Average Balance'

Average daily balance is most commonly used by credit card companies in calculating a monthly finance charge. The interest rate is multiplied by the average daily balance. Average monthly balance is commonly used by banks to determine whether or not a client meets account balance minimums to avoid being charged account fees. Creditors use the average monthly balance to assess a borrower's income stability when assessing loan eligibility. Large fluctuations in average monthly balances of bank accounts can signal an inconsistent income stream or big swings in spending habits. These are things potential lenders can view as risky.

For investors who trade on margin accounts, the average balance may be used to determine margin requirements, or any margin calls that the brokerage makes.

RELATED TERMS
  1. Basic Balance

    Basic balance is an economic measure for the balance of payments ...
  2. Adjusted Balance Method

    The adjusted balance method is a method of accounting for financing ...
  3. Balance Reporting

    Balance reporting is a report by a bank to a customer, normally ...
  4. Anticipated Balance

    Anticipated balance is the amount that a savings account will ...
  5. Total Finance Charge

    A total finance charge is a fee that a consumer must pay for ...
  6. Credit Balance

    In a margin account, A credit balance is the sum of proceeds ...
Related Articles
  1. Personal Finance

    The Credit Card Balance Transfer Trap

    Before you transfer a balance to a credit card with a lower interest rate, understand how it affects new purchases and other fine-print traps that can cost you.
  2. Investing

    What's a Trial Balance?

    A trial balance is a worksheet listing the debit or credit balances of all the ledger accounts for an entity. Under accounting theory, the total of all the debits must equal the total of all ...
  3. Personal Finance

    0% Balance Transfers: Can You Beat the Odds?

    Before you accept that 0% balance transfer offer, understand why you got it and who will probably profit most. Only accept if you can beat the odds.
  4. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  5. Investing

    What's the Balance of Trade?

    The balance of trade is the difference between the value of all the goods and services a country exports and the goods and services it imports.
  6. Insights

    The Balance Of Payments

    The "Balance of Payments" is a record of all payments or monetary transactions between a particular country and other nations during a specific time period. It provides a useful glimpse into ...
  7. Investing

    8 Stocks That Are Crushing the S&P 500

    Our second story on healthy balance sheet stocks looks at health care, energy and cosmetics cos.
  8. Personal Finance

    Simple Interest Loans: Do They Exist?

    Yes, they do. Here is what they are – and how to use them to your advantage.
RELATED FAQS
  1. Which is more important to a nation's economy, the balance of trade or the balance ...

    Learn how to differentiate between the balance of trade and balance of payments for international trade and why the balance ... Read Answer >>
  2. How is interest charged on most lines of credit?

    Learn how most financial institutions calculate interest on lines of credit by using the average daily balance method and ... Read Answer >>
  3. What is the difference between the current account and the capital account?

    Learn how to differentiate between the capital account and the current account, the two components of the balance of payments ... Read Answer >>
Trading Center