Calculate the monthly finance charge for the following 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 answer to the nearest cent.)
$500 balance, 20% rate, $50 payment, previous balance method
To calculate the monthly finance charge using the previous balance method, you need to follow these steps:
1. Determine the average daily balance:
- Start with the previous balance of $500.
- Subtract any payments made within the billing cycle. In this case, a $50 payment was made.
- If there were any purchases or cash advances during the billing cycle, add them to the remaining balance.
- Divide the result by the number of days in the billing cycle (30 days) to get the average daily balance.
In this case, the average daily balance is:
($500 - $50) / 30 = $450 / 30 = $15
2. Find the monthly interest rate:
- Divide the annual interest rate (20%) by 12 to get the monthly interest rate.
In this case, the monthly interest rate is:
20% / 12 = 1.67%
3. Calculate the monthly finance charge:
- Multiply the average daily balance by the monthly interest rate to obtain the finance charge for a single day.
- Multiply the daily finance charge by the number of days in the billing cycle to get the monthly finance charge.
In this case, the monthly finance charge is:
$15 * 1.67% = $0.25 (finance charge per day)
$0.25 * 30 (number of days in the billing cycle) = $7.50 (monthly finance charge)
Therefore, the monthly finance charge for this credit card transaction is $7.50.