Adjusted balance method definition
/What is the Adjusted Balance Method?
The adjusted balance method calculates the finance charges associated with a credit card account after all adjustments have been made to the account at month-end. The method is used in the same way for savings accounts, except that interest income is calculated after all adjustments have been made. In essence, the finance company or bank waits until the end of the billing period, aggregates all adjustments made to the account during the period, and then calculates any interest or finance charges based on this ending balance.
Since the ending balance usually includes payments made by customers (for credit card accounts), the balance is greatly reduced from what an averaging method might derive. Thus, the adjusted balance method tends to result in lower interest and fee charges to customers for credit card accounts. This can be a key decision factor for a person or business investigating which credit card to adopt. Similarly, a bank using this method calculates the interest income that an account holder earns for a month based on the ending balance in the account.
Example of the Adjusted Balance Method
As an example of the adjusted balance method, a credit card has a beginning balance of $500. The card holder makes $350 of additional purchases during the month, and pays down the account by $275. The adjusted balance method nets all of these items to arrive at an ending balance of $575, from which a finance charge is calculated. The monthly finance charge percentage is 2%, which results in a monthly finance charge of $11.50.
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Alternative Calculation Methods
The two alternative calculation methods are noted below. The adjusted balance method is more likely to result in no credit card interest charge at all, since it allows a balance payoff to eliminate the basis on which the interest charge would be calculated. This is not the case for the previous balance method and the average daily balance method.
Previous balance method. Under this method, calculations are based on the balance at the end of the immediately preceding period.
Average daily balance method. Under the average daily balance method, calculations are based on the average daily account balance during the reporting period.