Adjusted Balance Method Details

Savings accounts and some credit card issuers use the adjusted balance method to calculate the interest people owe at the end of the month. The financial institution with which you hold a savings and credit account figures your balance at the end of each month after it balances all of your deposits and withdrawals. This method considers any transactions (debits or credits) that the account holder made during that time.

Using the adjusted balance method over other methods certainly has its advantages. If you use the adjusted balance method, you will pay less interest—that is, if you make an effort to reduce the amount of credit you owe back to the company. Financial institutions only calculate interest charges on the ending balance. This is better than other methods like calculating interest on average daily balances or previous balances.

Adjusted Balance Method Example

John took out a credit card with a credit limit of $8,000. He quickly maxes the card after paying for a series of doctor visits. At the end of John's billing cycle, which is the end of the month, he has a credit card balance of $8,000. To avoid high interest rates and increase his available credit, John pays $100 one week and then makes another payment of $2,000 the next. John's adjusted balance at the end of the following billing cycle is $5,900. The credit card company then bases the amount of interest John owes off of his current balance instead of the original $8,000.

Significance of Adjusted Balance Method

The adjustment of credit card balances is a complex process. The most common way to calculate it is with the average daily balance method. However, this only considers transactions made on that particular day and divides this number by the total days or months on your account.

Another less popular solution? The adjusted balance method considers all past transactions throughout an entire cycle before calculating what you owe for interest charges based on these numbers. This is how banks can charge more from those whose accounts carry large debt compared with others who may have lower debt but not enough funds available at any given time during their billing cycle.

Previous Balance Method vs. Adjusted Balance Method

Both of these are methods used to calculate finance charges, but there are clear differences between them. If you're using a card with the previous balance method, your interest rate is based on how much debt was still outstanding at the beginning of each month. However, the cardholder is never in the best position when using this method.

Credit card companies benefit from customers who use the previous balance method to keep their monthly debt repayments low. For those working to pay off debts, this method does not acknowledge any of the debt the cardholder repaid during the month. Instead, the company sticks with what the holder owes.