4.8 balance methods notes
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4.8 Finance Charge Methods
HW pg. 178 #59, 1214 1
October 11, 2012
Sep 2010:40 AM
$525
$104.50
$7187.00
$2281.50
$195.97
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 2
October 11, 2012
Sep 2010:21 AM
Credit Card: preapproved credit used to purchase now and pay later
Credit Card Responsibility:use it if you can pay it offpay more than minimum balance to pay off quickly
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 3
October 11, 2012
Sep 2011:07 AM
Finance ChargeFinance Charge per $100 = (Finance charge/ amount financed) *100
The finance charge for a 6month, $1200 installment loan is $72. Find the annual % rate on the loan.
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 4
October 11, 2012
Sep 2010:23 AM
Interest Rates: APR (annual percentage rate)Credit card interest is compounding (interest is added each month based on amount of principal).
How long would it take you to pay off the purchase without interest?
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 5
October 11, 2012
Sep 2011:03 AM
APR = 24F F = finance charge P(n+1) P = original principal, n = # of payments per year
Find the APR for a finance charge of $5.75 per $100 for 9 payments.
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 6
October 11, 2012
Sep 2110:40 AM
HW pg. 163 #921
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 7
October 11, 2012
Oct 1011:35 AM
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 8
October 11, 2012
Sep 201:29 PM
$12,730.80
$586.56
$134.58
$37,091.94
$16,205.08
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 9
October 11, 2012
Sep 2211:16 AM
Previous Balance Method
charges interest on the balance in the account on the last billing date of the previous month. Any credits in current month are not included.
Finance charge = previous balance * periodic rate New balance = previous balance + (finance charge + new purchases + fees) (payments + credits)
Laura's card company uses the previous balance method. The monthly periodic rate is 1.5% and 18% APR. Her previous balance was $225.60.This month she purchased shoes for $128.99, gas for 21.89, dinner for $27.79. She returned a pair of shoes for $35.99 and made a payment of $75.00.Find the finance charge for the month and the new balance.
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 10
October 11, 2012
Sep 2211:33 AM
Adjusted Balance Methodsubtracts payments and credits during this month from the balance at the end of the previous month. Purchases and fees in current month are not included.
Adjusted balance = previous balance (payments + credits)Finance charge = adjusted balance * periodic rateNew balance = adjusted balance + finance charge + new purchases and feesLaura's card company uses the adjusted balance method. The monthly periodic rate is 1.5% and 18% APR. Her previous balance was $225.60.This month she purchased shoes for $128.99, gas for 21.89, dinner for $27.79. She returned a pair of shoes for $35.99 and made a payment of $75.00.Find the finance charge for the month and the new balance.
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 11
October 11, 2012
Sep 2211:53 AM
Laura's card company uses the average daily balance method. The monthly periodic rate is 1.5% and 18% APR. Her previous balance was $225.60.This month she purchased shoes for $128.99 on the 4th, gas for 21.89 on the 9th, dinner for $27.79 on the 12th. She returned a pair of shoes for $35.99 on the 18th and made a payment of $75.00 on the 24th.Find the finance charge for the month and the new balance.
Average Daily Balance Method (ADB)total of the balance at the end of each day during a period divided by the number of days in the period.
Daily Balance = Beginning balance (payments + credits) + (purchases + fees)ADB = sum of daily balances / # of days in billing periodFinance Charge = ADB * monthly periodic rateNew Balance = Beginning balance (payments + credits) + (finance charges + new purchases + fees)
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 12
October 11, 2012
Sep 237:08 AM
HW pg. 178 #59, 1214
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 13
October 11, 2012
Sep 2311:45 AM
$5.63
$35.84
$18.55
$13.73
$0.69
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 14
October 11, 2012
Sep 2610:54 AM
Review pg. 79 #11, 12, 13, 15, pg. 129 #17pg. 185 #17, 18, 19 11: $360.12
12: $9,167.5013: $54,029.9815: 21%17: $5,050.2517:$8.7218: $122.8519: $4.69, $320.16
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 15
October 11, 2012
Sep 152:58 PM
Average Daily Balance
The Average Daily Balance is the total of the balance at the end of each day during a period divided by the number of days in the period.
Average Daily Balance, or ADB, is often used to calculate periodic interest charges by multiplying the periodic interest rate by the average daily balance. The most common period used for this type of calculation is monthly, which can either be a rolling 30 day period, or an actual calendar month. The most common use of Average Daily Balance for typical consumers is credit cards that calculate monthly finance charges based on the average daily balance, although some only do this if the balance from the prior month is not paid in full by the due date.Example of Average Daily Balance
The method for finding the Average Daily Balance is illustrated in the chart below. In this example, let's assume the following:
* Starting balance on Jan 1: $1,987.65 * Period length: 7 days * Purchases: o Jan 2: $256.78 o Jan 5: $ 78.99 o Jan 7: $ 22.21 * Payments: o Jan 4: $497.15 o Jan 7: $800.00
Starting with the starting balance, add the purchases and subtract the payments for each day to find that day's balance. Be sure to include all the days in the period, even those with no transaction activity. Add these daily balances (in this case, seven of them) and divide by the number of days in the period (in this case, seven) to find the Average Daily Balance.Date
Purchases
Payments
BalanceJan 01 $ 1,987.65Jan 02 $256.78 $ 2,244.43Jan 03 $ 2,244.43Jan 04 $497.15 $ 1,747.28Jan 05 $ 78.99 $ 1,826.27Jan 06 $ 1,826.27Jan 07 $ 22.21 $800.00 $ 1,048.48 Total of Daily Balances: $12,924.81 Number of Days: 7 Average Daily Balance: $1,846.40
As you can see, making payments earlier can reduce your overall Average Daily Balance. This, in turn, will reduce your interest payments.
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 16
October 11, 2012
Sep 152:58 PM
Calculating the Average Daily Balance
Let’s say your APR is 12% and your billing cycle is 25 days long.
You started the billing cycle with a balance of $100. On Day 4, you made a $100 purchase. On Day 20, a $25 payment was credited to your account. Your daily balance during the billing cycle was:Day 1 – 3: $100Day 4 – 20: $200 ($100 purchase)Day 20 – 25: $175 ($25 credit)
To calculate your average daily balance you must total your balance from each day in the billing cycle and divide by the number of days in the cycle.
(Day 1 Balance + Day 2 Balance + Day 3 Balance…) / number of days in billing cycle$4575 / 25 = $183
Calculating the Average Daily Balance Finance ChargeBased on the details listed above, your finance charge using the average daily balance method would be:
$183 * .12 * 25 / 365 = $1.50
If you continued making minimum payments and no additional charges on this account, you'd pay $18.00 in finance charges over the course of a year.
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 17
October 11, 2012
Sep 152:57 PM
* Starting balance on Jan 1: $1,987.65 * Period length: 7 days * Purchases: o Jan 2: $256.78 o Jan 5: $ 78.99 o Jan 7: $ 22.21 * Payments: o Jan 4: $497.15 o Jan 7: $800.00
APR 22%
On Friday you had a balance of $52 on your credit card.On Monday you spent $17 from your credit card.On Wednesday you spent $24. Find your average daily balance for one week, (7days)starting from Friday.
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 18
October 11, 2012
Sep 152:58 PM
You Opened a Credit Card in January. You paid your balance in full for January and February, and in March you left $100 not paid. You make the following purchases and payments.
March 29 April 27PurchasesMarch 31 $25.40 Quik TripApril 1 $56.70 Macy'sApril 9 $11.56 Hong Kong InnApril 14 $31.42 ConocoApril 17 $107.23 Best BuyApril 20 $7.43 ChickfilAApril 24 $23.68 DillardsPaymentsApril 27 $45.00
Find the Average Daily Balance
Find the Finance Charges
Find the beginning balance for the next Statement
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 19
October 11, 2012
Sep 152:58 PM
New StatementApril 28 May 27PurchasesMay 3 $75.00May 12 $32.63PaymentsMay 26 $30.00
4.8 Finance Charge Methods
HW pg. 178 #59, 1214 20
October 11, 2012
Sep 152:58 PM
For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the balance stopped revolving).