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.