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What is an Average Balance?
The average balance refers to the average amount of money contained in an account over a given period of time. The number is determined by the amount of money in an account and the time period in question. The average balance is used for a number of different purposes, most notably to calculate the amount of credit card interest accrued in a set period of time.
Like any other average, the average balance is calculated by adding up the different amounts in the account and dividing that number by the period in question. For example, if an individual wanted to calculate the average daily balance over a five day period, he would add up the balance on day one, day two, day three, day four, and day five. You would then divide by five, since this is the number of days in question.
The average balance can be calculated over any period of time. Assume, for example, that someone had a credit card on which she owed $100 US Dollars (USD) the first month, $95 USD the second, $85 USD the third, $75 USD the fourth, $50 USD the fifth, $20 USD the sixth, and $0 USD for the rest of the year. Her average balance over the course of the year would be equal to (100+95+85+75+50+20+0+0+0+0+0+0)/12. This means the average annual balance on that credit card would be equal to approximately $35.42 USD.
Credit card companies often use the average daily balance in order to determine the monthly interest rate to assess. The company adds up the amount the cardholder owes each day throughout the month. They then divide this total number by the number of days in the month in order to determine the average daily balance.
Interest is then calculated based on the average daily balance. So, if an average daily balance was determined to be $100 USD, the credit card company would multiply this average daily balance by the account's interest rate to determine the amount of interest owed for that month. This process would then be repeated each month, based on the average daily balance calculations for that given month.
Average daily balance can also be calculated on a bi-monthly basis or a yearly basis. Credit card companies have also used a practice called double-cycle billing, which means that the interest rate is calculated based on the previous two months' average daily balance. In the US, the Fair Credit Practice laws put an end to double cycle billing, however.
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![Average balance is used for a number of different purposes, most notably to calculate the amount of credit card interest accrued in a set period of time.]()
By: estimaAverage balance is used for a number of different purposes, most notably to calculate the amount of credit card interest accrued in a set period of time.
Discussion Comments
@runner101 - I have had to do the same thing from time to time, and so far I have always eventually been able to pay down my credit card balances with good budgeting.
My suggestion for a balance transfer is look for special offers; they often offer a low or no interest rate for a certain amount of time. Then look at how much the company wants to charge to transfer the balance (they often charge a percentage of the entire balance).
If it still seems like a good deal then I would transfer especially if your credit card rate is over 10%. Those interest payments can add up quick.
@mutsy - That does not surprise me (that the average family carries $12,000 in debt). I was just talking to a friend about waiting to have children until I had less credit card debt, but she just laughed and said that when you have kids you will never not have some credit card debt.
I then told her that knowing that then I felt I at least needed to at least have a lower credit card balance so my cards would have more room on them for child emergencies or unseen costs!
I used to pay off my cards every single month, but with my husband losing his job we looked to the credit cards to pay for everyday necessities.
I am looking to lower my average daily balance by doing some balance transfers? Does anybody know something I should look out for or look into?
The only time that I carry a credit balance on a statement is when I buy something like electronics or furniture that offers no interest for a specific period of time.
I usually make equal payments every month until my balance is paid, and I try to pay it off before the interest starts to kick in.
I know that for my bank accounts I usually maintain an average balance within a certain range at all times. I use the money in the CD as part of my emergency fund which is why I never touch it.
I also try to maintain a certain budget so that my checking and savings accounts never dip below a certain balance. I think that the impulse spending is what gets people into trouble and cause them to carry higher balances on their credit cards. I read that the typical family carries an average balance of $12,000 in credit card debt.
I usually try to pay off my credit cards at the end of every month so essentially my balance is zero at the end of the month. I used to carry a credit card balance years ago and I found that if I continued to have a balance month after month. The balance would not only get bigger but eventually it would be a lot to tackle.
Before I got married, I had $9,000 in credit card debt because I continued to charge purchases and paid only the minimum required. When I realized that the only way I was going to get out of debt was to pay significant amounts towards my balance, I started to aggressively pay off this debt which I was able to do in six months.
If you really make it a focus you can pay off your credit cards you just have to come up with a plan that works for you.
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