What is the Adjusted Balance Method?
The adjusted balance method is an accounting method that bases finance charges on the amount(s) owed at the end of the current billing cycle after credits and payments post to the account.
How the Adjusted Balance Method Works
The adjusted balance method is used to calculate the interest owed for most savings accounts as well as by some credit card issuers. Using the adjusted balance method, the interest earned in a savings account is calculated at the end of the month after all the transactions (including debits and credits) have been posted to the account.
- Banks and credit card companies often use the adjusted balance method is used to calculate the interest owed by account holders.
- There are other balance methods used by credit cards other than the adjusted balance method, like the previous balance method.
- When it comes to figuring credit card balances, card issuers use the adjusted balance method far less frequently than either the average daily balance method (the most common) or the previous balance method.
- The previous balance method excludes payments, credits, and new purchases that took place during the current billing cycle, for calculating finance charges.
Credit card accounts that calculate finance charges due using the adjusted balance method incorporate a grace period. Why? Because purchases made and paid for during the interim period between the last statement and the close of the current billing cycle, do not figure in the account holders’ adjusted balance.
The adjusted balance method can help consumers lower overall costs on their savings accounts and credit cards.
Using the Adjusted Balance Method
Here is an example of how the adjusted balance method works: Assume you carried a credit card balance of $10,000 at the end of your card’s previous billing cycle. During the next period’s billing cycle, you pay down your balance by $1,200. You also receive a credit for a returned purchase of $200.
Assuming you made no other transactions during that period, your account’s adjusted balance for purposes of calculating your finance charges would total $8,600 instead of being based on the starting $10,000.
Advantages of the Adjusted Balance Method
Consumers can experience significantly lower overall interest costs with the adjusted balance method. Finance charges are only calculated on ending balances, which results in lower interest charges versus other methods of calculating finance charges, such as the average daily balance or the previous balance method.
As a condition of the federal Truth-In-Lending-Act (TILA), credit card issuers must disclose to consumers their method of calculating finance charges as well as annual periodic interest rates, fees, and other terms, in their terms and conditions statement. In addition to credit cards and savings accounts, the adjusted balance method is used for fee calculations for other types of revolving debt, including home equity lines of credit (HELOCs).