What is the method of modified balance?

The modified balance method is a special way of calculating interest in the financial account. This covers both the interest charged to the debtor and the interest paid by the saver. The method includes the calculation of a single interest at the end of each period and can bring significantly different results from other methods.

The calculation of interest fees or payments using a modified balance method is relatively simple. It works, for example, on the basis of interest recruitment cycle, once a month with an account that has a monthly billing cycle. The calculation includes the beginning of the closure of the balance from the previous period, deducting all payments or credits received by the bank during this period, then used this final balance to develop a fee for a month. It is only based on the previous clinking of balance and all installments in the meantime. The practical effect is that if the customer has made a purchase, but pays the money before the end of the current billing cycle, it will not be charged for this purchase. This system is the basis of a "free -year period"on many credit cards.

One point that can be omitted using a modified balance method is that it often does not take into account any interest fees used during the cycle. This means that the interest fee prepared at the end of January will not affect the data used to create an interest fee at the end of February and so on. This means that the method creates lower fees.

There are several variations on the method of modified balance that work on a similar principle, but with slightly different details. The previous balance is based only on the balance at the end of the previous cycle, meaning or new expenses, nor repayment during the current cycle do not affect a new interest fee. The balance of two cycles works by taking the takeover balance two months ago and taking into account payments from that date; The practical effect is that customers can only obtain a free time if they always pay the expenditure by the due date.

The most common method, the average daily balance, works in a completely different way. This means that the bank monitors the account balance at the end of each day during the cycle, then calculates the average balance at the end of the cycle. This balance is used to calculate the interest charge for the entire cycle. This can mean higher interest fees, although on the other hand, people who pay accounts before the due date will benefit.