Calculating Annuities, Payment Plans & Amortization: A Sears Revolving Charge Card has a monthly rate of 1.75%. the interest is a minimum of $0.50 if the average daily balance is $28.50 or less. Explain how this policy is beneficial to Sears
.0175(28.50) is 50 cents, so at any balance less than that, an interest charge of 50 cents would represent a rate higher than 1.75% per month
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The policy of having a minimum interest charge on a Sears Revolving Charge Card is beneficial to Sears because it ensures that they earn a minimum amount of interest revenue regardless of the customer's balance. Let's break down how this policy works.
First, we need to understand what an average daily balance is. The average daily balance is calculated by summing up the balances at the end of each day in a billing cycle and then dividing that total by the number of days in the cycle. It provides an indication of the customer's daily spending and repayment habits.
In the case of the Sears Revolving Charge Card, if the average daily balance is $28.50 or less, a minimum interest charge of $0.50 is applied. This means that even if the customer's balance is very low, they are required to pay a minimum amount of interest.
This policy is beneficial to Sears because it ensures that they earn a minimum amount of interest revenue from customers, regardless of how small their balances might be. By setting a minimum interest charge, Sears can cover some of the costs associated with servicing the account, such as administrative fees and customer support expenses.
Furthermore, having a minimum interest charge encourages customers to maintain a higher average daily balance, as the interest rate charged on balances above $28.50 will exceed the minimum interest charge. This means that customers will be incentivized to spend more with their Sears Revolving Charge Card, potentially increasing the revenue generated for Sears.
Overall, this policy helps Sears maintain a steady stream of interest income and encourages customers to spend more, which benefits their bottom line.