Nancy Tai recently opened a revolving charge account with Mastercard. Her limit is $1000, but she has not charge that much since opening the account. Nancy hasn't had the time to review her monthly statements as promptly as she should, but over the upcoming weekend,she plans to catch up on her work.
In reviewing November's statement , she notices that her beginning balance was $600 and that she made a $200 payment on November 10. She also charged purchase of $80 on November 5, $100 on Novermber 15, and $50 on November 30. She can't tell how much interest she paid in November because she spilled watercolor paint on that protion of her statement.She does remeber, though,seeing the letters APR and the number 16%. Also, the back of her statement indicates that interest was charge using the average daily balance method including current purchase, which considers the day of charge or credit. 1. Assuming a 30-day period in November, calculate November's interest using the average daily balance method. Also, calculate the interst Nancy would have paid with: a)the previous balance method, b)the adjusted balance method.
2.Going back in time, when Nancy was just about open her account, and assuming she could choose among credit sources that offered different monthly balance determinations , and assuming further that Nancy would increase her outstanding balance over time, which credit source would you recommend? Explain. (Show all work for each assignment and eplain each carefully).
To calculate Nancy's interest using the average daily balance method, we need to determine her average daily balance in November. Here's how we can do it:
1. Calculate the daily balance for each day in November:
- November 1-4: $600 (beginning balance)
- November 5-14: $680 ($600 + $80 purchase)
- November 15-29: $780 ($600 + $80 + $100 purchase)
- November 30: $830 ($600 + $80 + $100 + $50 purchase)
2. Calculate the number of days for each daily balance:
- November 1-4: 4 days
- November 5-14: 10 days
- November 15-29: 15 days
- November 30: 1 day
3. Calculate the weighted daily balances:
- November 1-4: $600 * 4 days = $2400
- November 5-14: $680 * 10 days = $6800
- November 15-29: $780 * 15 days = $11700
- November 30: $830 * 1 day = $830
4. Calculate the total weighted daily balance:
$2400 + $6800 + $11700 + $830 = $22,730
5. Calculate the average daily balance:
$22,730 / 30 days = $757.67
Now that we have the average daily balance, we can calculate the interest using different methods:
a) Previous balance method:
- The interest is charged on the previous balance without considering the current month's purchases or payments.
- Assuming Nancy's previous balance was $600, the interest calculation would be: $600 * 16% = $96.
b) Adjusted balance method:
- The interest is charged on the previous balance minus any payments made during the month.
- After Nancy's $200 payment, her adjusted balance would be: $600 - $200 = $400.
- The interest calculation would be: $400 * 16% = $64.
Based on the calculations, the interest Nancy would have paid with the average daily balance method is $757.67 * 16% = $121.23.
Now, for the second question about choosing a credit source, it's important to consider each method's impact on interest charges. The average daily balance method tends to be more favorable for credit card holders who tend to carry some balance over time or make additional purchases during the month. This is because it takes into account the daily balances, considering the timing of purchases and payments.
Therefore, for Nancy's situation where she plans to increase her outstanding balance over time and expects to make additional purchases, the credit source offering the average daily balance method would be recommended.
Note that the recommendation may vary depending on individual circumstances, so it's always important to carefully analyze the terms and conditions of the credit sources available and consider one's own purchasing and payment patterns before making a decision.