Suppose you have a $1,000 charge on a credit card charging 1% monthly interest using the adjusted balance method. The minimum payment due in May is $50. How much will you save in interest charges in June by paying $100 instead?
To calculate the interest charges in June with a $1,000 balance and a 1% monthly interest rate, we need to understand the "adjusted balance method" used by the credit card company.
The adjusted balance method calculates interest charges based on the average daily balance throughout the billing cycle. It subtracts any payments or credits made during the billing cycle from the average daily balance.
In May, you made a minimum payment of $50, so the credit card balance for the next billing cycle (June) will be $1,000 - $50 = $950.
Now, let's calculate the interest charges for June using the adjusted balance method:
1. Determine the average daily balance for June:
To find the average daily balance, you need to sum the balances of each day and divide by the number of days in June.
Let's assume June has 30 days (although it may vary), we can use this example for calculation purposes.
The daily balance for June will be $950, as you made a $50 payment on May 31st, which is also when the new billing cycle starts. So, the average daily balance for June will be $950.
2. Calculate the interest charges for June:
Multiply the average daily balance ($950) by the monthly interest rate (1% or 0.01):
$950 * 0.01 = $9.50
Therefore, the interest charges for June will be $9.50.
Now, let's find out how much you will save in interest charges in June by paying $100 instead of the minimum $50.
1. Determine the new balance for June:
Subtract the payment made ($100) from the balance for the new billing cycle ($950):
$950 - $100 = $850
2. Calculate the interest charges for June with the new balance:
Using the adjusted balance method again, we need to find the average daily balance for June, considering the $100 payment:
The average daily balance for June will be $850 (as calculated above).
Multiply the average daily balance ($850) by the monthly interest rate (1% or 0.01):
$850 * 0.01 = $8.50
Therefore, the new interest charges for June will be $8.50.
To find the amount you will save in interest charges by paying $100 instead of $50, subtract the new interest charges from the initial interest charges:
$9.50 - $8.50 = $1.00
Therefore, you will save $1.00 in interest charges in June by paying $100 instead of the minimum $50.