calculate the monthly finance charge for the credit card transaction. Assume that it takes 10 days for a payment to be received and recorded and that the month is 30 days long. ( round your answers to the nearest cent). $ 400 balance, 15%, $ 50 payment. A) previous balance method. B) adjusted method. C) average method
To calculate the monthly finance charge using each method, we need to understand how each method works.
A) Previous Balance Method:
The previous balance method calculates the finance charge based on the outstanding balance at the end of the previous billing cycle. To calculate the finance charge using this method, follow these steps:
1. Determine the average daily balance (ADB):
Multiply the balance by the number of days in the billing cycle (30 days in this case).
ADB = $400 × 30 = $12,000
2. Calculate the monthly interest rate:
Divide the annual interest rate by 12 (since we are calculating it for one month).
Monthly Interest Rate = 15% ÷ 12 = 0.0125
3. Compute the finance charge:
Multiply the ADB by the monthly interest rate.
Finance Charge = $12,000 × 0.0125 = $150
Therefore, the monthly finance charge using the previous balance method is $150.
B) Adjusted Balance Method:
The adjusted balance method calculates the finance charge based on the outstanding balance after subtracting the payment. To calculate the finance charge using this method, follow these steps:
1. Determine the adjusted balance:
Subtract the payment from the outstanding balance.
Adjusted Balance = $400 - $50 = $350
2. Calculate the monthly interest rate (same as above):
Monthly Interest Rate = 15% ÷ 12 = 0.0125
3. Compute the finance charge:
Multiply the adjusted balance by the monthly interest rate.
Finance Charge = $350 × 0.0125 = $4.375
Therefore, the monthly finance charge using the adjusted balance method is approximately $4.38.
C) Average Daily Balance Method:
The average daily balance method calculates the finance charge based on the average balance throughout the billing cycle. To calculate the finance charge using this method, follow these steps:
1. Determine the average daily balance (same as above):
ADB = $400 × 30 = $12,000
2. Calculate the monthly interest rate (same as above):
Monthly Interest Rate = 15% ÷ 12 = 0.0125
3. Compute the finance charge:
Multiply the ADB by the monthly interest rate.
Finance Charge = $12,000 × 0.0125 = $150
Therefore, the monthly finance charge using the average daily balance method is $150.
To summarize:
A) Previous Balance Method: $150
B) Adjusted Balance Method: $4.38
C) Average Daily Balance Method: $150