calculate the monthly finance charge for the 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 answers to the nearest cent). $ 400 balance, 15%, $ 50 payment. A) previous balance method. B) adjusted method. C) average method
To calculate the monthly finance charge for a credit card transaction using different methods (previous balance, adjusted balance, average daily balance), you need to follow specific formulas. I will explain each method and guide you through the calculations.
A) Previous Balance Method:
1. Determine the interest rate as a decimal. In this case, it is 15%, so the decimal form is 0.15.
2. Multiply the balance (in this case, $400) by the interest rate. 400 * 0.15 = $60.
3. Divide the interest by 12 to get the monthly finance charge. 60 / 12 = $5.
Therefore, using the previous balance method, the monthly finance charge would be $5.
B) Adjusted Balance Method:
1. Subtract the payment amount from the balance. 400 - 50 = $350.
2. Multiply the adjusted balance (in this case, $350) by the interest rate. 350 * 0.15 = $52.50.
3. Divide the interest by 12 to get the monthly finance charge. 52.50 / 12 = $4.38 (rounded to the nearest cent).
So, using the adjusted balance method, the monthly finance charge would be $4.38.
C) Average Daily Balance Method:
1. Determine the number of days in the billing cycle. In this case, it is 30 days.
2. Calculate the average daily balance by adding up the daily balances for each day in the billing cycle, then divide by the number of days.
- Daily balance = previous balance - payment
- For example, if you paid on the 10th day: 10 days with $400 balance + 20 days with $350 balance = $10,000 + $7,000 = $17,000 (total daily balance)
- Average daily balance = $17,000 / 30 = $566.67 (rounded to the nearest cent).
3. Multiply the average daily balance by the interest rate. 566.67 * 0.15 = $85.
Therefore, using the average daily balance method, the monthly finance charge would be $85.
Note: The calculations may vary slightly depending on the specific terms and conditions of your credit card issuer. These explanations and methods assume certain assumptions for simplicity. It is always advisable to refer to your credit card provider's terms and conditions for accurate calculations.