Suppose you have a $1,000 charge on a credit card charging 1.5% monthly interest using the adjusted balance method. The minimum payment due in May is $20. How much will you save in interest charges in June by paying $40 instead?
To calculate how much you will save in interest charges in June by paying $40 instead of the minimum payment due of $20, we need to understand how interest charges are calculated using the adjusted balance method.
The adjusted balance method is a common method used by credit card companies to calculate interest charges. It takes into account your balance at the beginning of the billing cycle and deducts any payments and credits made during that cycle. The remaining balance is then multiplied by the monthly interest rate to calculate the interest charges.
In this scenario, let's assume the monthly interest rate is 1.5% and the $1,000 charge occurred at the beginning of the billing cycle in May.
To calculate the adjusted balance for June, we need to subtract any payments made in May from the original balance. Since only the minimum payment of $20 was made in May, the adjusted balance for June would be $1,000 - $20 = $980.
Next, we calculate the interest charges for June by multiplying the adjusted balance by the monthly interest rate:
Interest charges for June = $980 * 1.5% = $14.70
Now, let's compare this to the scenario where a payment of $40 is made instead of the minimum payment due of $20.
If you make a payment of $40 in May, the adjusted balance for June would be $1,000 - $40 = $960.
Calculating the interest charges for June with the adjusted balance of $960:
Interest charges for June = $960 * 1.5% = $14.40
By paying $40 instead of the minimum payment of $20 in May, you would save $14.70 - $14.40 = $0.30 in interest charges in June.