Adjusted Balance = Previous Balance + New Charges - Payments/Credits. The method considers payments, reducing interest calculated on average balance.
The Adjusted Balance method is a way of calculating credit card interest by considering the average balance throughout the billing cycle. To find the Adjusted Balance, take the balance at the start of the billing cycle, add any new charges, and subtract any payments or credits made during that cycle.
Here's the formula:
Adjusted Balance = Previous Balance + New Charges - Payments/Credits
For instance, let's assume the previous balance at the beginning of the billing cycle was $1000, new charges during the cycle were $500, and a payment of $300 was made before the end of the cycle.
Adjusted Balance = $1000 + $500 - $300 = $1200
In this example, the Adjusted Balance at the end of the billing cycle is $1200. This amount is then used to compute interest charges for the next cycle.
The Adjusted Balance method is favorable for credit card users because it considers payments made during the billing cycle, reducing the average balance used to calculate interest. As a result, this method typically results in lower interest charges compared to other methods that consider the average daily balance or the ending balance.
It's important to note that different credit card companies might have variations in the way they calculate the Adjusted Balance, so it's advisable to check your card's terms and conditions for specific details.
Question:
In finance, how do you calculate the Adjusted Balance method for interest, considering credits, payments, and previous balances?