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 $40. How much will you save in interest charges in June by paying $80 instead?
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To calculate how much you will save in interest charges in June, we first need to understand how interest charges are calculated using the adjusted balance method.
The adjusted balance method takes into account the balance at the end of the billing cycle after subtracting the minimum payment due, payments made during the billing cycle, and any new purchases. The interest is then calculated based on this adjusted balance.
In this case, you have a $1,000 charge on a credit card with 1% monthly interest. Let's assume that no additional purchases were made and no other payments were made during the month of May.
To find the adjusted balance in May, we subtract the minimum payment due ($40) from the total balance ($1,000). The adjusted balance in May is $960.
Now, we can calculate the interest charged in May. Multiply the adjusted balance ($960) by the monthly interest rate (1% or 0.01) to get $9.60 in interest charges for May.
If you make a payment of $80 in June, you will reduce the outstanding balance. However, since this payment is made in June, it will not affect the interest charges for May.
To find out how much you will save in interest charges in June, we need to calculate the interest charges for June with the adjusted balance after the $80 payment.
After the $80 payment, the balance remaining in June will be $960 - $80 = $880.
Now, calculate the interest charges for June by multiplying the adjusted balance in June ($880) by the monthly interest rate (1% or 0.01). The interest charges for June will be $8.80.
Therefore, by paying $80 instead of the minimum payment of $40, you will save $9.60 - $8.80 = $0.80 in interest charges in June.