Suppose you have a $1,000 charge on a credit card charging 1% monthly interest using the adjusted balance method. The minimum payment due in May is $50. How much will you save in interest charges in June by paying $100 instead?
$ 1
To calculate how much you will save in interest charges in June by paying $100 instead of the minimum payment of $50, you need to understand how the adjusted balance method and interest calculations work.
The adjusted balance method is a common way credit card issuers calculate interest charges. It takes into account the previous month's balance and any payments or credits made during the current month. The interest is typically calculated based on the average daily balance over the billing cycle.
To calculate the interest charges for May, you need to consider the $1,000 charge and any previous balances or payments. Let's assume there were no previous balances or payments. Therefore, the average daily balance for May is $1,000.
To calculate the interest charges for May, you need to multiply the average daily balance ($1,000) by the monthly interest rate (1% or 0.01). The result is $10. This means you will be charged $10 in interest for May.
Now, let's consider the situation for June. If you make the minimum payment of $50, your outstanding balance for June will be $950. To calculate the interest charges for June, you need to calculate the average daily balance again. The average daily balance will be the unpaid balance from May ($950) divided by the number of days in June.
Assuming June has 30 days, the average daily balance for June will be $950/30 = $31.67.
Now, multiply the average daily balance for June ($31.67) by the monthly interest rate (1% or 0.01) to calculate the interest charges for June. The result is approximately $0.32.
If you pay $100 instead of the minimum payment in June, your outstanding balance for June will be $950 - $100 = $850. Following the same calculation, the average daily balance for June will be $850/30 = $28.33. Then, multiply the average daily balance for June ($28.33) by the monthly interest rate (1% or 0.01) to calculate the interest charges for June. The result is approximately $0.28.
By paying $100 instead of the minimum $50 in June, you would save approximately $0.04 in interest charges for that month.