Calculate the monthly finance charges for the following 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. $500 balance, 20% rate, $400 payment, average daily balance method.
To calculate the monthly finance charges for the credit card transaction using the average daily balance method, we need to follow a few steps:
Step 1: Determine the number of days in the billing cycle.
Given that the month is 30 days long, the billing cycle is also 30 days.
Step 2: Calculate the average daily balance.
To find the average daily balance, we need to know the balance at the end of each day in the billing cycle. In this case, we have the following information:
- Initial balance: $500
- Payment: $400
Using this information, we can calculate the average daily balance as follows:
[(27 days * $500) + (3 days * $100)] / 30 days = $470
Step 3: Calculate the daily periodic rate.
The daily periodic rate is calculated by dividing the annual interest rate by the number of days in a year. In this case, the annual interest rate is 20%, so the daily periodic rate is:
20% / 365 = 0.0548%
Step 4: Calculate the average daily interest.
To find the average daily interest, multiply the average daily balance by the daily periodic rate:
$470 * 0.0548% = $0.2564
Step 5: Calculate the monthly finance charges.
Finally, to determine the monthly finance charges, multiply the average daily interest by the number of days in the billing cycle:
$0.2564 * 30 = $7.692
Therefore, the monthly finance charges for this credit card transaction using the average daily balance method would be approximately $7.69.