A Sears Relvolving charge card has a monthly rate of 1.75%, the interest is a minimum of $.50 if the average daily balance is $28.50 less. Explain how this poilicy is beneficial to Sears.
28.50x.00175=49cents.
so it brings in more money to bill $.50
Sears' revolving charge card policy benefits the company in a couple of ways. Firstly, let's break down how the policy works:
1. Monthly Rate: The revolving charge card has a monthly interest rate of 1.75%. This means that if you have an outstanding balance on your card at the end of the billing cycle, Sears will charge you 1.75% of that balance as interest.
2. Minimum Interest: Regardless of the size of your outstanding balance, there is a minimum interest charge of $0.50. So even if your balance is very low, you'll still be charged at least $0.50 in interest.
3. Average Daily Balance: To calculate the interest charges, Sears uses the average daily balance method. This means that they determine your average balance by adding up the balances on your card each day and dividing it by the number of days in the billing cycle.
4. $28.50 Less: However, there's a catch. If your average daily balance is $28.50 less than your statement balance, then you'll only be charged the minimum interest of $0.50. In other words, if your average daily balance is below this threshold, you get a break on the interest charges.
Now, let's discuss why this policy is beneficial to Sears:
1. Minimum Interest Guarantee: By implementing a minimum interest charge of $0.50, Sears ensures that even customers with very small balances still generate some revenue. This guarantees a minimum level of income for Sears from revolving charge cardholders.
2. Encourages Card Usage: The policy also encourages customers to continue using their Sears revolving charge cards. Knowing that they will only be charged $0.50 in interest if their average daily balance is $28.50 less than their statement balance gives customers an incentive to keep using the card, even if they can't pay off their full balance each month.
3. Potential for Higher Interest Revenue: On the other hand, for customers with higher average daily balances, Sears can earn more interest revenue. The 1.75% interest rate will apply to those balances above the $28.50 threshold. So, Sears stands to gain more revenue from customers who carry larger balances on their cards.
In summary, Sears' revolving charge card policy benefits the company by ensuring a minimum level of income from all cardholders, encouraging card usage even with small balances, and providing the potential for higher interest revenue from customers with larger balances.