Nancy Tai has recently opened a revolving charge account with MasterCard. Her credit limit is \$1000, but she has not charged that much since opening the account. Nancy hasn't had the time to review her monthly statements as promptly as she should, but over the upcoming weekend, she plans to catch up on her work.

In reviewing November's statement, she notices that her beginning balance was \$600 and that she made a \$200 payment on November 10. She also charged purchases of \$80 on November 5, \$100 on November 15, and \$50 on November 30. She can't tell how much interest she paid in November because she spilled watercolor paint on that portion of the statement. She does remember, though, seeing the letters APR and the number 16%. Also, the back of her statement indicates that interest was charged using the average daily balance method including current purchases, which considers the day of a charge or credit.

Assuming a 30-day period in November, calculate November's interest. Also, calculate the interest Nancy would have paid with: a) the previous balance method, b) the adjusted balance method.
Going back in time, when Nancy was just about to open her account, and assuming she could choose among credit sources that offered different monthly balance determinations, and assuming further that Nancy would increase her outstanding balance over time, which credit source would you recommend? Explain.

I will be glad to critique your thinking on this. Begin by reviewing the meaning of the daily balance, adjusted balance and previous balance methods of interest computation.

If her credit balance will usually increase on a month to month basis over time, then her previous balance will usually be less than her average or adjusted balance. That should give you a clue to the answer to the last question.

15 years ago

8 months ago

## To calculate Nancy Tai's interest for November, we need to use the average daily balance method including current purchases. This method considers the day of a charge or credit.

Here is the breakdown of Nancy's account activity in November:

- Beginning balance: \$600
- Payment made on November 10: \$200
- Charges on:
- November 5: \$80
- November 15: \$100
- November 30: \$50

To calculate the average daily balance, we need to determine the balance at the end of each day and add them up. Let's go through the calculations step by step:

1. November 1: Beginning balance of \$600
2. November 2 to 4: No new transactions, balance stays at \$600
3. November 5: Charge of \$80, new balance becomes \$680
4. November 6 to 9: No new transactions, balance stays at \$680
5. November 10: Payment of \$200, new balance becomes \$480
6. November 11 to 14: No new transactions, balance stays at \$480
7. November 15: Charge of \$100, new balance becomes \$580
8. November 16 to 29: No new transactions, balance stays at \$580
9. November 30: Charge of \$50, new balance becomes \$630

Next, we calculate the average daily balance:

[(600 * 3) + (680 * 5) + (480 * 4) + (580 * 14) + (630 * 3)] / 30 = 566.67

The average daily balance for November is \$566.67.

Now, let's calculate the interest using an annual percentage rate (APR) of 16%. To find the monthly interest rate, we divide the APR by 12: 16% / 12 = 1.33%.

Interest = Average Daily Balance * Monthly Interest Rate * Number of Days

Interest = 566.67 * 0.0133 * 30 = \$238.33 (rounded to two decimal places)

So, Nancy paid approximately \$238.33 in interest for November using the average daily balance method.

Now, let's discuss the previous balance method and the adjusted balance method.

1. Previous Balance Method: With this method, the interest is calculated based on the balance at the beginning of the billing cycle. In Nancy's case, it would be \$600. So, the interest using the previous balance method would be:

Interest = Previous Balance * Monthly Interest Rate = \$600 * 0.0133 = \$7.98

2. Adjusted Balance Method: This method takes into account any credits or payments made during the billing cycle. In Nancy's case, the \$200 payment made on November 10 would be deducted from the balance. So, the adjusted balance would be \$480. The interest using the adjusted balance method would be:

Interest = Adjusted Balance * Monthly Interest Rate = \$480 * 0.0133 = \$6.38

Therefore, the interest using the previous balance method is \$7.98 and using the adjusted balance method is \$6.38.

Now, let's address the last question. If Nancy's credit balance is expected to increase over time (assuming she will usually have an outstanding balance at the end of each month), it would be beneficial for her to choose a credit source that offers the adjusted balance method for interest computation.

The adjusted balance method takes into account payments made during the billing cycle, resulting in a lower interest charge compared to the previous balance method. This can save Nancy money on interest payments, especially when her outstanding balance increases over time.

In conclusion, I would recommend Nancy to choose a credit source that offers the adjusted balance method if her outstanding balance is expected to increase month to month.