Question

Calculate the monthly finance charge for the credit card transaction. Assume that it takes 10 days for a payment to be received and recorded, and that the month is 30 days long. (Round your answers to the nearest cent.) $400 balance, 14%, $50 payment

(a) previous balance method

(b) adjusted balance method

(c) average daily balance method

Answer 1

(a) Previous balance method:

Finance charge = Beginning balance x Annual rate x (Billing period / Total number of days)

= $400 x 14% x (30/365)

= $4.60

(b) Adjusted balance method:

Finance charge = (Beginning balance - Payment) x Annual rate x (Billing period / Total number of days)

= ($400 - $50) x 14% x (30/365)

= $4.03

(c) Average daily balance method:

Finance charge = Average daily balance x Annual rate x (Billing period / Total number of days)

= $166.67 x 14% x (30/365)

    = $1.92

Average daily balance = [(Beginning balance x 10) + (payment x 20)] / Billing period

= [($400 x 10) + ($50 x 20)] / 30

= ($4,000 + $1,000) / 30

= $5,000 / 30

= $166.67