Barts credit card issuer uses the previous balance method to calculate interest on his Mastercard. On his last statement, his previous balance was $1764.33. If his card carries a 22.25% APR and Bart has a 31-day billing cycle, how much interest will be added to Barts next statement balance?
To calculate the interest using the previous balance method, you need to follow these steps:
Step 1: Determine the daily periodic rate (DPR)
The annual percentage rate (APR) needs to be converted to a daily periodic rate (DPR). To do this, divide the APR by the number of days in a year. In this case, the billing cycle is 31 days.
DPR = APR / 365
DPR = 22.25% / 365
Step 2: Calculate the average daily balance (ADB)
The average daily balance is calculated by taking the sum of the previous balance for each day in the billing cycle and dividing it by the number of days in the cycle.
ADB = Previous Balance * Number of Days / Billing Cycle
ADB = $1764.33 * 31 / 31
Step 3: Calculate the interest
The interest is calculated by multiplying the average daily balance (ADB) by the daily periodic rate (DPR).
Interest = ADB * DPR
Now, let's calculate the interest for Bart's next statement balance.
DPR = 22.25% / 365 = 0.0006082 (rounded to four decimal places)
ADB = $1764.33 * 31 / 31 = $1764.33
Interest = $1764.33 * 0.0006082
Using a calculator, we find that the interest amount will be approximately $1.07.
Therefore, $1.07 will be added to Bart's next statement balance.