Adjusted balance

What is an adjusted balance?

Adjusted balance is one of several methods that credit card companies use to calculate a cardholder’s finance charge. The latter is the fee charged when a cardholder carries a balance from month to month instead of paying the balance off in full by each month’s due date. 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 and adds any credits posted to the account during the current cycle.

Deeper definition

Using the adjusted balance method gives consumers a grace period on new purchases because new purchases made in the current billing cycle aren’t added to the adjusted balance. This means the interest charge is not applied to those new balances, only to the balance at the end of the previous cycle minus any payments or credits. It also means that the adjusted balance method typically gives cardholders the lowest possible finance charge.

Adjusted balance isn’t the only way of calculating a cardholder’s balance and the resulting interest charge each month, nor is it the most common.

Instead, a majority of credit card companies use either the daily balance or average daily balance method. Unlike the adjusted balance method, these other two methods use all transactions during the current billing cycle when formulating the balance and assessing the finance charge.

Adjusted balance example

With the adjusted balance method, every credit to your account will be subtracted before the credit card company assesses the finance charge. For example, say you had a 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, 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 to your account to give you an adjusted balance of $3,000. Then, it would apply the finance charge to this balance instead of to the original $5,000.

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