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?
Steps please.
To figure out how much you will save in interest charges by paying $100 instead of the minimum $50 due, we need to follow these steps:
Step 1: Calculate the adjusted balance for May
The adjusted balance is the difference between the total balance and any payments or credits made during the billing cycle.
Adjusted balance = Total balance - Payments or credits
In this case, the total balance is $1,000, and the payment made in May is $50.
Adjusted balance = $1,000 - $50 = $950
Step 2: Calculate the finance charge for May
The finance charge is the interest charged for carrying a balance on the credit card during the billing cycle.
Finance charge = Adjusted balance * Monthly interest rate
The monthly interest rate is 1%, which is equivalent to 0.01 in decimal form.
Finance charge = $950 * 0.01 = $9.50
Step 3: Calculate the adjusted balance for June
Since you'll be paying $100 in June, we need to deduct that amount from the adjusted balance for May.
Adjusted balance for June = Adjusted balance for May - Payment made in June
Adjusted balance for June = $950 - $100 = $850
Step 4: Calculate the finance charge for June
Using the adjusted balance for June and the same monthly interest rate of 1%:
Finance charge for June = Adjusted balance for June * Monthly interest rate
Finance charge for June = $850 * 0.01 = $8.50
Step 5: Calculate the interest savings in June
To determine the interest savings in June, subtract the finance charge for June when paying $100 from the finance charge for June when paying the minimum $50.
Interest savings = Finance charge for June (minimum payment) - Finance charge for June ($100 payment)
Interest savings = $8.50 - $9.50 = -$1.00
In this scenario, you would not save interest charges but rather pay $1.00 more by making a $100 payment instead of the minimum $50 payment in June.