Using the average daily balance method and the information given, find the credit card finance charge for the month of August (31 days). The annual interest rate is 18%.
July 31st (Balance) $590
August 5 (Charge) $90
August 9 (Payment)$560
August 14 (Charge)$193
August 24 (Charge)$41
I do not know how to do this. I know I am using I=PRT. However, I am getting my answers wrong.
Aug.5-8 (590+90=680)3*680=2040
Aug.9-13 (680-560=$120)4*120=480
Aug.14-23 (120+193-$313)9*313=2817
Aug.24-24 (313+41=$354) 1*354
Second part
2040+480+2817+354=5691
5691/31(days)=183.6 (Round to nearest cent)
Third Part
I=PRT
183.6*.18*31/365=2.8068 (Round to nearest cent)
Final Answer that I got was 2.80
However, this is incorrect. I am not sure what I am doing wrong.
I am not familiar with the
"average daily balance method " , I don't live in the US.
Perhaps one of the other math tutors can help out here.
Alright, thank you for your response!
To calculate the finance charge using the average daily balance method, you need to follow these steps:
1. Determine the average daily balance for each day of the billing cycle.
- July 31st to August 4th: The balance is $590.
- August 5th to August 8th: The balance is $590 + $90 = $680.
- August 9th to August 13th: The balance is $680 - $560 = $120.
- August 14th to August 23rd: The balance is $120 + $193 - $313 = $0.
- August 24th to August 31st: The balance is $0 + $41 = $41.
2. Calculate the total of the average daily balances by adding up the balances from step 1.
Total = ($590 x 4) + ($680 x 4) + ($120 x 9) + ($0 x 10) + ($41 x 8) = $7,180.
3. Divide the total average daily balances by the number of days in the billing cycle.
Average daily balance = $7,180 / 31 = $231.94.
4. Calculate the finance charge using the formula I = PRT, where:
I = Finance charge
P = Average daily balance
R = Annual interest rate (18% or 0.18)
T = Number of days in the billing cycle (31)
Finance charge = $231.94 x 0.18 x (31/365) = $3.09 (rounded to the nearest cent).
Therefore, the credit card finance charge for the month of August is $3.09.