Adjusted balance is one of several methods that credit card companies use to calculate the interest charged at the end of a cardholder’s billing cycle.

With the adjusted balance method, the credit card company starts with the balance from the end of the last billing cycle and subtracts any payments made during the billing cycle. If you received any credits during the billing cycle, such as credits for returned payments, they would be factored into the calculation as well.

The amount left over is your adjusted balance — and this balance determines how much credit card interest will be added to your monthly credit card bill.

What is the adjusted balance method?

When a credit card company uses the adjusted balance method to determine interest charges, every payment made against your account and every credit put toward your account will be subtracted from your total balance before your credit card company assesses the finance charge. (Your finance charge includes both the interest charged on your balance and any fees associated with your credit card account.)

The adjusted balance method gives consumers a grace period on new purchases since purchases made in the current billing cycle aren’t included in the adjusted balance. This is why the adjusted balance method typically gives cardholders the lowest possible finance charge.

How does adjusted balance work?

Here’s an example to help you understand how the adjusted balance method works. Let’s say you had a credit card balance of $5,000 at the end of the last billing cycle, and you made a payment of $1,500 during the current billing cycle. The company would subtract this payment from the original credit card balance, giving you an adjusted balance of $3,500.

If you returned an item that cost $500 during the current billing cycle, the credit card company would credit this refund to your account — giving you an adjusted balance of $3,000. Your credit card issuer would then apply your credit card APR to this $3,000 balance, instead of to the original $5,000, saving you money by reducing your monthly finance charge.

When you should use the adjusted balance method

The adjusted balance method isn’t the only way of calculating a cardholder’s balance. Many banks and credit card companies use either the daily balance or average daily balance method.

In most cases, paying off your balance on a regular basis is the best way to save money on interest and finance charges. That said, finding a credit card issuer that uses the adjusted balance method could also reduce the amount of interest you pay on your credit card — especially if you have good or excellent credit and can take advantage of a lower credit card interest rate.

Read your credit card terms and conditions to learn whether or not your credit card issuer uses the adjusted balance method. If you’re applying for a new credit card, make sure you check the terms and conditions to learn how interest is calculated.

The bottom line

The adjusted balance method is one of the ways credit card companies calculate interest rates and finance charges. If your credit card issuer uses the adjusted balance method, all payments and credits made to your account during a given billing cycle will be subtracted from your total balance before any interest is charged.