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.)
$500 balance, 17%, $50 payment
(a) previous balance method
(b) adjusted balance method
(c) average daily balance method
To calculate the monthly finance charge using the different methods mentioned, we will need to know the specific formulas for each method.
(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, you can use the following formula:
Finance Charge = Previous Balance * Monthly Interest Rate
Monthly Interest Rate = (Annual Interest Rate / Number of Months in a Year)
Let's calculate:
Previous Balance = $500
Annual Interest Rate = 17%
Number of Months in a Year = 12
Monthly Interest Rate = (17% / 12) = 0.0142
Finance Charge = $500 * 0.0142 = $7.10
Therefore, the monthly finance charge using the previous balance method is $7.10.
(b) Adjusted Balance Method:
The adjusted balance method calculates the finance charge based on the remaining balance after subtracting any payments made during the billing cycle. To calculate the finance charge using this method, you can use the following formula:
Finance Charge = Adjusted Balance * Monthly Interest Rate
Adjusted Balance = Previous Balance - Payment
Let's calculate:
Adjusted Balance = $500 - $50 = $450
Monthly Interest Rate = 0.0142 (calculated in previous method)
Finance Charge = $450 * 0.0142 = $6.39
Therefore, the monthly finance charge using the adjusted balance method is $6.39.
(c) Average Daily Balance Method:
The average daily balance method calculates the finance charge based on the average daily balance throughout the billing cycle. To calculate the finance charge using this method, you can use the following formula:
Finance Charge = Average Daily Balance * Daily Interest Rate * Number of Days in the Billing Cycle
Average Daily Balance = (Sum of Daily Balances) / Number of Days in the Billing Cycle
Daily Interest Rate = (Annual Interest Rate / Number of Days in a Year)
Let's calculate:
Daily Interest Rate = (17% / 365) = 0.0004658
Number of Days in the Billing Cycle = 30
To calculate the Average Daily Balance, we need the daily balances for each day in the billing cycle. Unfortunately, the information provided does not give us this information. Therefore, we cannot provide an accurate calculation for the monthly finance charge using the average daily balance method.
In summary:
(a) Previous Balance Method: $7.10
(b) Adjusted Balance Method: $6.39
(c) Average Daily Balance Method: Cannot be calculated without daily balance information.