Answer to Question #88516 in Finance for Allison Jenkins

Question

Suppose that you spent $200 on clothes and paid with a credit card. Your credit card company's monthly interest rate is 1.6 percent, and you paid $100 of your bill halfway through the month. Figure out the finance charge for the first two methods.
(1)Previous Balance (2) Adjusted Balance

Answer 1

Assume: APR 1.6% percent monthly or 0.0533 percent daily (. 000533)

Days in the billing cycle: 30

1) Previous Balance Method:

The creditor would charge .000533 times the previous balance of $ 200 times the number of days in the billing cycle (30). This would total $ 3.2. Your $ 100 payments mid-month is ignored in calculating interest owed.

Previous balance method interest calculation = 200 x 30 x .000533 = $ 3.2

2) Adjusted Balance Method:

You would be charged $ 1.6. That is: .000533 times the adjusted balance ($ 100), which is the previous balance ($ 200), minus payments made ($ 100). This is multiplied by 30, the number of days in the billing cycle.

Adjusted Balance Method interest calculation = (200 - 100) x 30 x .000533 = $ 1.6