Adjusted Balance Method
What Is the Adjusted Balance Method?
The adjusted balance method is a accounting method that bases finance charges on the amount(s) owed toward the finish of the current billing cycle after credits and payments post to the account.
How the Adjusted Balance Method Works
The adjusted balance method is utilized to compute the interest owed for most savings accounts as well as by some credit card issuers. Utilizing the adjusted balance method, the interest earned in a savings account is calculated toward the month's end after every one of the transactions (counting debits and credits) have been posted to the account.
Credit card accounts that work out finance charges due utilizing the adjusted balance method integrate a grace period. Why? Since purchases made and paid for meanwhile period between the last statement and the close of the current billing cycle, don't figure in the account holders' adjusted balance.
The adjusted balance method can assist consumers with bringing down overall costs on their savings accounts and credit cards.
Utilizing the Adjusted Balance Method
Here is an illustration of how the adjusted balance method functions: Assume you carried a credit card balance of $10,000 toward the finish of your card's previous billing cycle. During the next period's billing cycle, you pay down your balance by $1,200. You likewise receive a credit for a returned purchase of $200.
Accepting you made no different transactions during that period, your account's adjusted balance for reasons for working out your finance charges would total $8,600 as opposed to being founded on the starting $10,000.
Benefits of the Adjusted Balance Method
Consumers can experience altogether lower overall interest costs with the adjusted balance method. Finance charges are just calculated on ending balances, which brings about lower interest charges versus different methods of computing finance charges, for example, 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 computing finance charges as well as annual periodic interest rates, fees, and different terms, in their terms and conditions statement. Notwithstanding credit cards and savings accounts, the adjusted balance method is utilized for fee estimations for different types of revolving debt, including home equity lines of credit (HELOCs).
Features
- Banks and credit card companies frequently utilize the adjusted balance method is utilized to work out the interest owed by account holders.
- The previous balance method prohibits payments, credits, and new purchases that occurred during the current billing cycle, for working out finance charges.
- With regards to figuring credit card balances, card issuers utilize the adjusted balance method undeniably less often than either the average daily balance method (the most common) or the previous balance method.
- There are other balance methods utilized by credit cards other than the adjusted balance method, similar to the previous balance method.
