Question

You have a credit card with an APR of 24%. You begin with a balance of $800. In the first month you make a payment of $400 and you make charges amounting to $350. In the second month you make a payment of $400 and you make new charges of $650.

Complete the following table. (Round your answers to the nearest cent.)

	Previous balance	Payments	Purchases	Finance charge	New balance
Month 1	$800	$	$	$	$
Month 2	$	$	$	$	$

Answer 1

The following information is given in the question:

	Previous balance	Payment	Purchase
Month 1	800	400	350
Month 2		400	650

APR (Annual percentage rate) = 24%

Thus, interest rate per month = APR/12 = 24%/12 =2%

Finance charges are levied by the issuer of credit card for any delayed payments of the dues. Generally, the purchases made in the current month becomes due the following month and hence the finance charges are applied on net outstanding (opening balance less payments) excluding the recent purchases.

Finance charges can be calculated as = Previous month balance - payments made during the month + Purchases made in the previous month + interest charges of previous month.

Thus, finance charges for month 1 = 800 - 400 + 0 + 0 =400*2%=8

Thus, the new closing balance for month 1 = opening balance - payments + purchases + finance charges

= 800-400+350+8 = 758 (this becomes the opening balance for month 2

Finance charges for month 2 = 758 - 400 + 350 + 8 =716*2%=14.32 (Previous month balance - payments made during the month + Purchases made in the previous month (month 1) + interest charges of previous month (month 1))

Thus, the new closing balance for month 2 = opening balance - payments + purchases + finance charges

= 758-400+650+14.32 = 1022.32.

Please find below the completed table:

	Previous balance	Payment	Purchase	Finance charges	New balance
Month 1	800.00	400.00	350.00	8.00	758.00
Month 2	758.00	400.00	650.00	14.32	1,022.32