Question

The balance on a credit card, that charges a 15.5%APR interest rate, over a 1 month period is given inthe following table:Days 1-5: $200 (initial balance)Days 6-20: $350 ($150 purchase)Days 21-30: $150 ($200 payment)What is the finance charge, on the average dailybalance, for this card over this 1 month period?finance charge = $ [?]Round to the nearest hundredth.Enter

Answer 1

First step is to get the average daily balance.

Take the sum of each day's balances.

If a payment has been made, the sign will be negative.

From Days 1 - 5 :

Day 1 = $200

Day 2 = $200

...

Day 5 = $200

That's $200 x 5 days = $1000

From Days 6 - 20 :

Day 6 = $350

Day 7 = $350

...

Days 20 = $350

That's $350 x 15 days = $5250

From Days 21 - 30 :

Day 21 = $150

Day 22 = $150

...

Day 30 = $150

That's $150 x 10 days = $1500

A total of :

$1000 + $5250 + $1500 = $7750

Now divide this total to the number of days to get the ADB or Average Daily Balance.

$\text{ADB}=\frac{7750}{30}=258.33$

Next Step is to calculate for the finance charge using the formula :

$\text{Charge}=\text{ADB}\times r\times d$

where ADB is the average daily balance

r is the interest rate per day

d is the number of days or period given

From the problem, APR is 15.5%, it means that we need to divide the APR by 365 days.

So r = 0.155/365 = 0.000425

And we have d = 30 days

The charge will be :

Charge = 258.33 x 0.000425 x 30 = $3.29

The answer is $3.29