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 $20. How much will you save in interest charges in June by paying $40 instead?
To calculate the interest charges in June, we first need to determine the adjusted balance in May.
The adjusted balance is the most common method used to calculate interest charges. It involves subtracting any payments made during the billing cycle from the previous balance, rather than including them as part of the average daily balance.
In this case, the previous balance is $1,000, and the payment made in May is $20. Therefore, the adjusted balance for May would be $1,000 - $20 = $980.
Now, let's calculate the interest charges for June using the adjusted balance method.
First, we need to determine the monthly interest rate. The credit card charges 1.5% monthly interest, which can be converted to a decimal by dividing by 100. So the monthly interest rate is 1.5% / 100 = 0.015.
Next, we multiply the adjusted balance by the monthly interest rate. In this case, the interest charges for June would be $980 * 0.015 = $14.70.
Now, let's compare the interest charges in June with different payment scenarios. If you pay the minimum $20, the remaining balance at the end of May would be $980 - $20 = $960. Therefore, the interest charges for June would be $960 * 0.015 = $14.40.
If you pay $40 instead of the minimum payment, the remaining balance at the end of May would be $980 - $40 = $940. Therefore, the interest charges for June would be $940 * 0.015 = $14.10.
By paying $40 instead of the minimum $20, you would save $14.40 - $14.10 = $0.30 in interest charges in June.