Nancy Tai has recently opened a revolving charge account with MasterCard. Her credit limit is $1000, but she has not charged that much since opening the account. Nancy hasn't had the time to review her monthly statement as promptly as she should, but over the upcoming weekend, she plans to catch up on her work. In reviewing November's statement, she notice that her beginning balance was $600 and that she made a $200 payment on November 10. She also charged purchases of $80 on November 5, $100 on November 15, and $50 on November 30. She can't tell how much interest she paid in November because she spilled watercolor paint on that portion of the statement. She does remember, though, seeing the letters APR and the number 16%. Also, the back of her statement indicates that interest was charged using the average daily balance method including current purchases, which considers the day of a charge or credit.
Assuming a 30 day period in November, calculate November's interest. Also, calculate the interest nancy would have paid with:
a)the previous balance method, b) the adjusted balance method.
Going back in time, when Nancy was just about to open her account, and assuming she could choose among credit sources that offered different monthly balance determinations, and assuming further that Nancy would increased her outstanding balance, which credit source would you recommend?
Derek, please answer this question for me. Thank you! candy
As this is the same question Jes asked last week, I will give you my same answer.
An EXCEL spreadsheet is very useful for these types of calculations. First, determine the balance of the account for every day in the month. Calculate the average (sum the 30 balances and divide by 30). Multiply by the APR interest rate divided by 12.
Under most circumstances, including a growing outstanding balance, the adjusted balance method should be the most desireable by the consumer. Do the math.
To calculate November's interest using the average daily balance method, you can follow these steps:
1. Start with the beginning balance of $600.
2. Add any new charges made throughout the month: $80 + $100 + $50 = $230.
3. Subtract any payments or credits made during the month: $200.
4. This will give you the average daily balance for November.
5. Multiply the average daily balance by the APR (Annual Percentage Rate) divided by 12 (to get the monthly rate), which is 16% / 12 = 0.0133.
6. Calculate the interest by multiplying the average daily balance by the monthly rate: Average daily balance x 0.0133.
To calculate the interest using the previous balance method, you would simply multiply the previous balance ($600) by the monthly rate (0.0133).
To calculate the interest using the adjusted balance method, you would subtract any payments or credits made during the month from the previous balance and then multiply the adjusted balance by the monthly rate.
Comparing the three methods, the average daily balance method would result in the highest interest amount, followed by the previous balance method, and finally the adjusted balance method.
Considering that Nancy plans to increase her outstanding balance, the adjusted balance method would be recommended. This method takes into account the payments made during the month, reducing the outstanding balance and ultimately resulting in lower interest charges.