Adjusted Balance Method: What Is It, Its Advantages [ + Example]

Introduction

The adjusted balance method is a popular way credit card companies calculate interest, but have you ever wondered how much you’re really paying? This method starts by taking your previous balance and subtracting any payments or credits made during the billing cycle. But what happens to those extra purchases or refunds? With the adjusted balance, only the remaining amount at the end of the cycle is used to calculate your interest. 

Not sure how this method works? In this blog, we’ll explore the concept of the adjusted balance method, explain how it works, and highlight its advantages. We’ll also provide real-world examples to show how this calculation can impact the interest you pay.

What is the Adjusted Balance Method?

The adjusted balance method is how credit card companies calculate interest by adjusting your balance at the end of a billing cycle. It takes your starting balance from the previous cycle and subtracts any payments or credits made during the current cycle. This adjusted balance is then used to calculate your interest.

By factoring in payments and refunds before applying interest, the adjusted balance method often results in lower interest charges, making it a more favorable option for cardholders who regularly make payments.

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How Does the Adjusted Balance Method Work?

The adjusted balance method works by calculating interest on your balance after deducting any payments or credits made during the billing cycle. Here’s how it works with an example:

Suppose your balance at the end of last month was $1,000. During the current billing cycle, you made a payment of $400 and received a credit of $100 for a returned item. With the adjusted balance method, your new balance is calculated as  follows:

$1,000 – $400 (payment) – $100 (credit) = $500 (adjusted balance)

Interest is then applied only to the adjusted balance of $500 instead of the original $1,000. This method typically results in lower interest charges compared to methods that don’t consider payments or credits made during the cycle.

Advantages of the Adjusted Balance Method

The adjusted balance method provides several benefits, especially for cardholders who consistently make payments. Here are some key advantages of the adjusted balance method:

1. Lower interest charges

Since payments and credits made during the billing cycle are subtracted before calculating interest, you pay interest only on the remaining balance. This often results in lower overall interest charges and can help you save money over time.

2. Rewards timely payments

Cardholders who make regular payments benefit from lower balances being used for interest calculation. This approach not only encourages good financial habits but also ensures that responsible payment behavior is rewarded with lower interest rates.

3. Fair calculation

Unlike methods that use the average daily balance or previous balance, this method only applies interest to what’s left after payments. This provides a more accurate and fair interest assessment, ensuring that you’re not penalized for paying down your balance throughout the cycle.

4. Greater control over interest

By reducing your balance through payments or credits before interest is applied, you have more control over how much interest you’ll owe. This method allows you to manage your finances better and potentially lower your interest costs over time.

When is the Adjusted Balance Method Used?

The adjusted balance method is most beneficial in scenarios where you can actively manage and reduce your credit card balance. It’s particularly useful when you want to optimize your interest charges by accounting for any payments or credits made during the billing cycle. Understanding when to use this method can help you make the most of its advantages. Here are some situations where the adjusted balance method is ideal:

• If you regularly make payments on your credit card, the adjusted balance method helps you benefit from lower interest charges by calculating interest on the reduced balance after payments.

• When you receive refunds or credits during a billing cycle, the adjusted balance method ensures these are factored into your interest calculation, potentially lowering your interest charges.

• For those who want to minimize interest costs, the adjusted balance method offers a more favorable calculation compared to methods that apply interest on the balance before any payments or credits.

How Can HighRadius Help? 

HighRadius provides a comprehensive cloud-based solution designed to automate and streamline B2B payments for businesses. Our B2B Payments Software includes a robust payments module with features like a payment gateway, surcharge management, and interchange optimization. Besides, it seamlessly integrates components into merchants’ eCommerce and SAP systems. Electronic Invoicing & Collections also utilize this suite to streamline payment processing within their workflows.

Payment Gateway: Our B2B Payment Gateway module helps businesses streamline payment processing. Businesses can effortlessly secure, authorize and settle credit card and ACH payments for sales orders, while seamlessly reconciling payments through 4-way matching. With this integration, businesses can leverage the benefits of eliminating PCI compliance costs and achieving 100% touchless reconciliation. 

Surcharge Compliance Module: Our Surcharge Compliance Technology ensures adherence to surcharge regulations and ensures precise calculation and processing of surcharge transactions. Configured to comply with specific rules for each merchant and entered card number, this module accurately computes the applicable fee and presents it to the user. It also furnishes the merchant with comprehensive reports on compliance and cost savings.

Interchange Fee Optimizer: Our Interchange Fee Optimizer module efficiently processes transactions by leveraging card details and available transaction data to minimize merchant fees. With support for over 30 payment processors, each with unique data and API requirements, HighRadius ensures that invoice data necessary for optimizing interchange fees is included in every payment transaction request. This customization is tailored by processor, transaction, and card product type, maximizing cost savings for merchants.

Payment Gateway for SAP: The Payment Gateway for SAP module is an SAP-certified solution seamlessly integrated into a merchant’s SAP landscape, facilitating streamlined payment workflows. It enhances SAP sales order functionality by linking with the merchant’s payment processor(s), thereby enabling the complete lifecycle of payment processing. This includes crucial functions such as tokenization, authorization, settlement/capture, and reconciliation, ensuring a comprehensive and efficient payment management system within SAP environments.

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FAQs

1. What is the adjusted balance method?

The adjusted balance method calculates credit card interest by starting with the end-of-cycle balance and subtracting any payments or credits made during the cycle. Interest is then applied to the remaining balance, often resulting in lower charges compared to other methods.

2. How to calculate the adjusted balance method?

To calculate the adjusted balance method, start with the end-of-cycle balance, then subtract any payments or credits made during the billing cycle. The resulting amount is your adjusted balance, on which interest is calculated. This approach typically results in lower interest charges.

3. What is the adjusted balance method formula?

The formula for the adjusted balance method is Adjusted Balance = Ending Balance – Payments – Credits. Interest is then calculated on this adjusted balance. This method typically results in lower interest charges compared to methods that don’t account for payments and credits.