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 will save in interest charges by paying $60 instead of the minimum payment of $30 in May, we need to determine the interest charges for both scenarios.
First, let's calculate the interest charges with the minimum payment of $30. The adjusted balance method takes into account the balance at the beginning of the billing cycle (in this case, $1,000) and subtracts any payments made during the cycle.
1. Calculate the adjusted balance for May: Adjusted Balance = Balance - Payment
Adjusted Balance = $1,000 - $30 = $970
2. Calculate the interest charges for May: Interest Charges = Adjusted Balance * Monthly Interest Rate
Monthly Interest Rate = 1.5% = 0.015
Interest Charges = $970 * 0.015 = $14.55
Now, let's calculate the interest charges with a payment of $60 in May.
1. Calculate the adjusted balance for June: Adjusted Balance = Balance - Payment
Adjusted Balance = $1,000 - $60 = $940
2. Calculate the interest charges for June: Interest Charges = Adjusted Balance * Monthly Interest Rate
Interest Charges = $940 * 0.015 = $14.10
By paying $60 instead of the minimum payment of $30 in May, you would save $14.55 - $14.10 = $0.45 in interest charges in June.