Question

Lana has a credit card that uses the adjusted balance method. For the first 10

days of one of her 30-day billing cycles, her balance was $2800. She then
made a payment of $1200, so her balance decreased to $1600, and it
remained that amount for the next 10 days. Lana then made a purchase for
$500, so her balance for the last 10 days of the billing cycle was $2100. If her
credit card's APR is 35%, how much was Lana charged in interest for the
billing cycle?
A. $60.41
B. $80.55
C. $14.38
D. $46.03

Answer 1

A. $60.41

Explanation:

You want the finance charge on Lana's credit card if the APR is 35%, the billing cycle is 30 days, and her initial balance of $2800 is adjusted by a payment of $1200 and a purchase of $500.

Adjusted balance

The balance on Lana's card after payments and purchases is ...

$2800 -1200 +500 = $2100

The adjusted balance method of computing the finance charge uses this balance. The finance charge is ...

I = Prt

I = $2100 · 0.035 · (30/365) ≈ $60.41

Lana is charged $60.41 in interest for the billing cycle, choice A.

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Additional comment

The average daily balance method would take into account when the payments and charges were made, so that interest would only be charged for the time a the card had a particular balance. In this particular case, the adjusted balance method saves Lana a little bit of money.

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