Question

Assume the​ following: Melita carried an average daily balance of ​$521 on her credit card this month. Her previous balance last month was ​$1,047​, compared to a balance of ​$53 this month. There are 30 days in this billing cycle and Melita always makes a payment on the fifteenth of the month. Based on this​ information, calculate the monthly interest charges for credit card accounts charging ​16 percent,18 ​percent, and 20 percent interest. Complete the following chart. Since the average daily balance is the most commonly used balance calculation​ method, is shopping for a lower interest rate really that​ important?

16​% ​ 18% 20​%

Average Daily Balance ​$6.95

Previous Balance ​$15.71

Adjusted Balance ​ $0.88

The three primary methods used to determine interest charges on unpaid credit balances are​ (1) the average daily balance​ method, (2) the previous balance​ method, and​ (3) the adjusted balance method.

The monthly interest charges can be compared using the following​ table:

16​% ​ 18% ​ 20%

Average Daily Balance ​$6.95

Previous Balance ​ $15.71

Adjusted Balance ​$0.88

Answer 1

1. Monthly Interest rate based on Average Daily Balance:

  

calculation	interest	rate
(1047x15)+(53x15)x16%x30/365	216.99	16%
(1047x15)+(53x15)x18%x30/365	244.11	18%
(1047x15)+(53x15)x20%x30/365	271.23	20%

Shopping for lower interest rate of 16% amounts to interest of $216.99

2. Interest charges as per average daily balance method:

Taking average daily balance of $ 6.95 we get

calculation	interest	rate
(6.95*30)*16%*30/365	2.741918	16%
(6.95*30)*18%*30/365	3.084658	18%
(6.95*30)*20%*30/365	3.427397	20%

3. Interest charges as per previous balance method:

calculation	interest	rate
(15.71*30)*16%*30/365	6.197918	16%
(15.71*30)*18%*30/365	6.972658	18%
(15.71*30)*20%*30/365	7.747397	20%

4.Interest charges as per adjusted balance method:

calculation	interest	rate
(.88*30)*16%*30/365	0.347178	16%
(.88*30)*18%*30/365	0.390575	18%
(.88*30)*20%*30/365	0.433973	20%