Average Balance

Annual percentage rate can be defined as an interest rate where all the costs associated with a loan are reflected by the interest rate for a specific time period mostly one year.

As the name indicates the average balance shows the balance of an account. This balance can be the simple balance or it can be the weighted balance of the account. There are a number of ways of calculating the average balance of an account. The most simple and the fundamental way of calculating the average balance is to calculate the beginning balance and the ending balance of the balance and dividing this figure with two. However in order to calculate the weighted balance the length of the time for which the balance was kept in the account is also calculated. The most common use of the average balance is in a situation where the credit card companies use the weighted average balance to calculate finance charges related to that credit card.

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: $1,000
Period length: 7 days
Purchases:
Jan 2: $100
Jan 5: $200
Jan 7: $100
Payments:
Jan 4: $300
Jan 7: $500

Beginning 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.

 

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