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 amount you will save in interest charges in June by paying $40 instead of the minimum payment of $20, we need to understand how interest is calculated using the adjusted balance method.
The adjusted balance method calculates interest based on the outstanding balance after deducting any payments made since the last statement. So, in May, the outstanding balance is $1,000.
First, let's calculate the interest charged for May using the adjusted balance method.
1. Calculate the adjusted balance:
Adj. Balance = Outstanding Balance - Payments Made
Adj. Balance = $1,000 - $20 (minimum payment)
Adj. Balance = $980
2. Calculate the interest charged:
Interest Charged = Adj. Balance * Monthly Interest Rate
Monthly Interest Rate = 1.5% / 100 = 0.015
Interest Charged = $980 * 0.015
Interest Charged = $14.70
So, you were charged $14.70 in interest for May.
Now, let's calculate the interest charged for June if you pay $40 instead of the minimum payment.
1. Calculate the adjusted balance:
Adj. Balance = Outstanding Balance - Payments Made
Adj. Balance = $1,000 - $40
Adj. Balance = $960
2. Calculate the interest charged:
Interest Charged = Adj. Balance * Monthly Interest Rate
Interest Charged = $960 * 0.015
Interest Charged = $14.40
By paying $40 instead of the minimum payment of $20, you will save $14.70 - $14.40 = $0.30 in interest charges in June.