Question

4. You have a credit card with purchase amount of 4,184.40 and an interest rate of 12.49% Lets say that you use this particular card strictly for this purchase. In this case, would the amount of interest calculated vary depending on whether the bank used the unpaid balance or the average daily balance Method Explain slove

5. This particular card has a minimum monthly payment of 3% of the balance plus any interest accrued during the month. What would your first minimum payment be?

slove

Answer 1

The unpaid balance Method: In this method the interest is based on the previous month’s balance

Interest = Purchase amount (balance) * Annual interest rate * (1/number of months in a year)  

= $4,184.40 * 12.49% * (1/12)

=$43.55

The average daily balance Method: In this method balance is calculated based on end of day’s balance for each of the day of the month. There are no other purchases or payments for the month, therefore average daily balance will remain at $4,184.40 (=$4,184.40*30/30)

Interest = Average daily balance * Annual interest rate * (30/number of days in a year)

= $4,184.40 * 12.49% * (30/365)

= $42.96

The amount of interest will vary depending on the method used to compute the charges.

5. This particular card has a minimum monthly payment of 3% of the balance plus any interest accrued during the month. What would your first minimum payment be?

The unpaid balance Method:

First minimum payment = 3% of the balance + interest accrued during the month

= 3% * $4,184.40 + $43.55

= $125.53 + $43.55

=$ 169.08

The average daily balance Method:

First minimum payment = 3% of the balance + interest accrued during the month

= 3% * $4,184.40 + $42.96

= $125.53 + $42.96

= $168.49