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 $30. How much will you save in interest charges in June by paying $60 instead?
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To calculate how much you would save in interest charges in June by paying $60 instead of the minimum payment of $30, we first need to understand how interest charges are calculated using the adjusted balance method.
The adjusted balance method calculates interest charges based on the outstanding balance after subtracting the minimum payment made for the month. In this case, you have a $1,000 charge on your credit card, and the minimum payment due in May is $30.
So, the remaining balance after making the minimum payment will be $1,000 - $30 = $970.
Now, we need to calculate the interest charged for May. The interest rate is given as 1.5% per month. To calculate the interest, we need to multiply the outstanding balance by the monthly interest rate:
Interest for May = $970 × 0.015 = $14.55
Now, let's calculate the balance at the start of June. The balance at the start of June will be the previous remaining balance plus the interest charged for May:
Balance at the start of June = $970 + $14.55 = $984.55
If you make a payment of $60 in June instead of the minimum payment of $30, you would subtract $60 from the balance at the start of June:
Remaining balance after paying $60 in June = $984.55 - $60 = $924.55
Finally, we can calculate the interest charged for June using the adjusted balance method:
Interest for June = $924.55 × 0.015 = $13.87
Therefore, by paying $60 instead of the minimum payment of $30, you would save $14.55 - $13.87 = $0.68 in interest charges for June.