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.
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?
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To determine which credit source would be recommended for Nancy Tai, we need to understand the different monthly balance determinations and factors to consider. There are three common methods used: average daily balance, adjusted balance, and previous balance.
1. Average Daily Balance Method: This method considers the day of a charge or credit and takes into account the average daily balance during the billing period. This means that any purchases or payments made throughout the month are factored in.
2. Adjusted Balance Method: This method considers the beginning balance of the month and subtracts any payments made during the billing period. It does not include any purchases made during the month.
3. Previous Balance Method: This method takes into account the balance at the end of the previous billing period and does not consider any payments or purchases made during the current billing period.
Since Nancy plans to increase her outstanding balance over time, it is recommended to choose a credit source that uses the average daily balance method. This method will consider both her payments and purchases throughout the month, providing a more accurate representation of her balance and allowing her to make more informed financial decisions.
To determine the best credit source for Nancy Tai, we need to understand the different monthly balance determinations and how they affect the interest charged.
The three commonly used methods for calculating monthly balances are:
1. Average Daily Balance Method: This method considers the balance on each day of the billing cycle and calculates the average daily balance for the month.
2. Previous Balance Method: This method considers the balance at the end of the previous billing cycle as the starting point for calculating the interest.
3. Adjusted Balance Method: This method subtracts any payments or credits made during the billing cycle from the previous balance before calculating the interest.
In Nancy's case, her statement mentions that interest was charged using the average daily balance method, including current purchases. This means that each day's balance, including new purchases, is taken into account when calculating the average daily balance.
Now, if Nancy plans to increase her outstanding balance over time, the average daily balance method may be more favorable because it considers the day of a charge or credit. This means that any new purchases will be included in the average daily balance, thus potentially increasing the total interest charged.
Based on this information, I would recommend Nancy to choose a credit source that offers the average daily balance method for monthly balance determinations. This way, she can keep track of her expenses and minimize the interest charged by paying off her balances promptly.