Suppose you have a $1,000 charge on a credit card charging 1.5% monthly interest using the adjusted balance method. The minimum payment due in May is $40. How much will you save in interest charges in June by paying $80 instead?
To calculate how much you will save in interest charges in June by paying $80 instead of the minimum payment of $40, we first need to determine the interest charges for both scenarios.
Step 1: Calculate the interest charges for the minimum payment of $40 in May.
The first thing we need to do is calculate the adjusted balance for May. Adjusted balance is the remaining balance after deducting the minimum payment from the initial balance.
Adjusted balance = Initial balance - Minimum payment
Adjusted balance = $1,000 - $40
Adjusted balance = $960
Next, we calculate the interest charges on the adjusted balance.
Interest charges = Monthly interest rate * Adjusted balance
Monthly interest rate = 1.5% = 0.015 (in decimal form)
Interest charges = 0.015 * $960
Interest charges = $14.40
Step 2: Calculate the interest charges for the payment of $80 in June.
Now, let's calculate the adjusted balance for June. Adjusted balance is the remaining balance after deducting the payment amount from the initial balance.
Adjusted balance = Initial balance - Payment amount
Adjusted balance = $1,000 - $80
Adjusted balance = $920
Next, we calculate the interest charges on the adjusted balance.
Interest charges = Monthly interest rate * Adjusted balance
Interest charges = 0.015 * $920
Interest charges = $13.80
Step 3: Calculate the interest saved in June.
To determine how much you will save in interest charges in June, subtract the interest charges for the payment of $80 from the interest charges for the minimum payment of $40.
Interest saved = Interest charges for minimum payment - Interest charges for payment of $80
Interest saved = $14.40 - $13.80
Interest saved = $0.60
Therefore, by paying $80 instead of the minimum payment of $40, you will save $0.60 in interest charges in June.