finance charges
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. (Round your answers to the nearest cent.)
$500 balance, 17%, $50 payment
(a) previous balance method
(b) adjusted balance method
(c) average daily balance method
To calculate the monthly finance charge for the credit card transaction using the different methods, you need to consider the specific calculation for each method. The three methods commonly used are the previous balance method, the adjusted balance method, and the average daily balance method. Let's calculate the finance charge for each method.
(a) Previous Balance Method:
In this method, the finance charge is calculated based on the balance at the beginning of the billing cycle. To calculate the finance charge using the previous balance method, follow these steps:
1. Determine the monthly interest rate:
Divide the annual interest rate (17%) by 12 (months) to get the monthly interest rate.
Monthly Interest Rate = Annual Interest Rate / 12
Monthly Interest Rate = 17% / 12 = 0.0175
2. Calculate the average daily balance:
Multiply the daily balance by the number of days in the billing cycle. In this case, the month is considered to have 30 days.
Average Daily Balance = $500 * 30 = $15,000
3. Calculate the finance charge:
Multiply the average daily balance by the monthly interest rate.
Finance Charge = Average Daily Balance * Monthly Interest Rate
Finance Charge = $15,000 * 0.0175 = $262.50
So, the monthly finance charge using the previous balance method is $262.50.
(b) Adjusted Balance Method:
In this method, the finance charge is calculated based on the balance left after subtracting the payment made during the billing cycle. To calculate the finance charge using the adjusted balance method, follow these steps:
1. Determine the monthly interest rate (same as in the previous method):
Monthly Interest Rate = Annual Interest Rate / 12
Monthly Interest Rate = 17% / 12 = 0.0175
2. Calculate the adjusted balance:
Subtract the payment made during the billing cycle from the previous balance.
Adjusted Balance = $500 - $50 = $450
3. Calculate the finance charge:
Multiply the adjusted balance by the monthly interest rate.
Finance Charge = Adjusted Balance * Monthly Interest Rate
Finance Charge = $450 * 0.0175 = $7.88 (rounded to the nearest cent)
So, the monthly finance charge using the adjusted balance method is $7.88.
(c) Average Daily Balance Method:
In this method, the finance charge is calculated based on the average daily balance over the billing cycle. To calculate the finance charge using the average daily balance method, follow these steps:
1. Determine the monthly interest rate (same as in the previous methods):
Monthly Interest Rate = Annual Interest Rate / 12
Monthly Interest Rate = 17% / 12 = 0.0175
2. Calculate the daily balance:
Subtract the payment made on each day from the balance.
Day 1: $500
Day 2-10: $500 - $50 = $450
3. Calculate the average daily balance:
Add up the daily balances and divide by the number of days (10).
Average Daily Balance = (Day 1 + Day 2-10) / 10
Average Daily Balance = ($500 + $450 * 9) / 10 = $455
4. Calculate the finance charge:
Multiply the average daily balance by the monthly interest rate.
Finance Charge = Average Daily Balance * Monthly Interest Rate
Finance Charge = $455 * 0.0175 = $7.96 (rounded to the nearest cent)
So, the monthly finance charge using the average daily balance method is $7.96.