Legal Definitions - average daily balance

Definition: Average daily balance refers to the average amount of money in an account, such as a bank account or credit-card account, during a given period. This amount serves as the basis for computing interest or a finance charge for the period.

Example: Let's say you have a credit card with a balance of $1,000. On the first day of the billing cycle, your balance is $1,000. On the second day, you make a payment of $500. Your balance for that day is $500. On the third day, you make another payment of $200. Your balance for that day is $300. This continues for the rest of the billing cycle. At the end of the billing cycle, the credit card company will add up the daily balances and divide by the number of days in the billing cycle to get the average daily balance. This is the amount on which they will calculate the interest or finance charge for the period.

Explanation: The example illustrates how the average daily balance is calculated for a credit card account. The credit card company adds up the daily balances and divides by the number of days in the billing cycle to get the average daily balance. This amount is used to calculate the interest or finance charge for the period.