Calculate the monthly finance charge for the credit card transaction. Assume that it takes 10 days for a payment to be received and recorded and that the month is 30 days long
Balance:
$200
Rate:
18%
Payment:
$50
Method:
Adjusted balance
To calculate the monthly finance charge using the adjusted balance method, follow these steps:
Step 1: Determine the average daily balance for the billing cycle.
Average Daily Balance = (Balance x Number of days) / Number of days in the billing cycle
Given that the balance is $200 and the month is 30 days long, the average daily balance would be:
Average Daily Balance = ($200 x 30) / 30 = $200
Step 2: Determine the average daily balance for the payment grace period.
Average Daily Balance for the payment grace period = (Balance x Number of days before payment is recorded) / Number of days in the billing cycle
Given that it takes 10 days for a payment to be received and recorded, the average daily balance for the payment grace period would be:
Average Daily Balance for the payment grace period = ($200 x 10) / 30 = $66.67
Step 3: Calculate the monthly finance charge.
Monthly Finance Charge = (Average Daily Balance - Average Daily Balance for the payment grace period) x Interest Rate x Number of days in the billing cycle / Number of days in a year
Given an interest rate of 18% and a billing cycle of 30 days, the formula would be:
Monthly Finance Charge = ($200 - $66.67) x 0.18 x 30 / 365
Monthly Finance Charge = $133.33 x 0.18 x 0.0822
Monthly Finance Charge = $2.28
Therefore, the monthly finance charge for the credit card transaction would be approximately $2.28.
To calculate the monthly finance charge using the adjusted balance method, you need to determine the average daily balance for the billing cycle.
The average daily balance is calculated by taking the sum of the daily balances and dividing it by the number of days in the billing cycle. The daily balance is the balance of the credit card at the end of each day.
Here's how you can calculate the monthly finance charge using the adjusted balance method:
1. Determine the daily balance: Start with the balance at the beginning of the billing cycle and add any new charges. Subtract any payments or credits that have been made. Keep track of the balance at the end of each day.
For this example, let's assume that there were no new charges during the billing cycle and a $50 payment was made after 10 days.
Day 1: $200
Day 2: $200
...
Day 10: $200 - $50 = $150 (payment made)
2. Calculate the average daily balance: Add up the daily balances from step 1 and divide it by the number of days in the billing cycle (30 days).
Average daily balance = (Sum of daily balances) / (Number of days in the billing cycle)
In this example, the sum of the daily balances is $1500 ($200 for 9 days + $150 for 21 days). Divide this sum by 30:
Average daily balance = $1500 / 30 = $50
3. Calculate the monthly finance charge: Multiply the average daily balance by the monthly interest rate. The monthly interest rate is the annual interest rate divided by 12.
Monthly finance charge = Average daily balance * (Monthly interest rate)
Monthly interest rate = Annual interest rate / 12
In this example, the rate is 18%:
Monthly interest rate = 18% / 12 = 0.015
Multiply the average daily balance by the monthly interest rate:
Monthly finance charge = $50 * 0.015 = $0.75
So, the monthly finance charge for this credit card transaction would be $0.75.