Adjusted Balance Method - Explained
What is the Adjusted Balance Method?
Written by Jason Gordon
Updated at April 18th, 2022
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Table of Contents
What is the Adjusted Balance Method?How is the Adjusted Balance Method Used?Example of the Adjusted Balance MethodAdvantages of Adjusted Balance MethodAcademics Research on Adjusted Balance MethodWhat is the Adjusted Balance Method?
The adjusted balance method is a method used in accounting in order to assess finance charges on the amount that an individual/company owes until the end of billing period once all credits and payments are recorded.
Back to:BANKING, LENDING, & CREDIT INDUSTRY
How is the Adjusted Balance Method Used?
Most of the financial institutions including banks use adjusted balance method for assessing the amount of interest that savings account holders and credit card users owe. In case of savings account, interest is ascertained every month after posting all debit and credit transactions. Considering credit cards, finance charges are calculated using a grace period as anything bought or purchased between the last month statement and the end of the existing billing period, cannot fit in the adjusted balance of the account holder.
Example of the Adjusted Balance Method
With this example, the working of adjusted balance method will be clearer: For instance, you have a credit card balance of $10,000 at the end of the last billing period of your card. In the next billing cycle, you pay $1200, along with getting a credit for a return worth $200. Lets assume that these were the only two credit card-based transactions you made in that period. Considering it, the adjusted balance for ascertaining finance charges would be $8600 ($10,000 - $1200 - $200), and not the whole $10,000.
Advantages of Adjusted Balance Method
Adjusted balance method offers lesser interest costs to its customers. As finance charges are ascertained at the end of billing cycle on ending balances, it leads to lesser interest rates as compared to other methods including average daily balance or previous balance method. However, credit card issuers find average daily balance method and previous balance method more reliable for identifying credit card balances than adjusted balance method. The reason being they don't consider payments, credits and recent purchases made in the current billing cycle in order to assess finance charges. Truth-In-Lending-Act asks credit card issuers to inform their customers about the method they'll be using for assessing finance charges, interest rates per annum, fees, etc. in their terms and conditions page. Besides credit cards and savings accounts, adjusted balance method is also widely used to calculate fee for different types of debt such as home equity lines of credit.