Final answer:
To calculate the monthly finance charge using the average daily balance method, follow these steps: calculate the average daily balance, multiply it by the monthly interest rate, calculate the portion of the month the charge applies to, and multiply the monthly interest charge by the portion of the month the charge applies to. Using the numbers provided, the monthly finance charge for this credit card transaction is approximately $2.50.
Step-by-step explanation:
To calculate the monthly finance charge using the average daily balance method, you need to follow these steps:
- Calculate the average daily balance by adding up the daily balances for each day in the billing cycle and dividing by the number of days.
- Multiply the average daily balance by the monthly interest rate (17% divided by 12) to get the monthly interest charge.
- Calculate the number of days between the transaction date and the payment date, and divide by 30 to get the portion of the month the charge applies to (10 divided by 30).
- Multiply the monthly interest charge by the portion of the month the charge applies to (from step 3) to get the monthly finance charge.
Using the numbers provided ($800 balance, 17% interest rate, $750 payment, 10 days between transaction and payment):
- The average daily balance is $800 multiplied by 20 days (30 days - 10 days), divided by 30. This equals $533.33.
- The monthly interest rate is 17% divided by 12, which is approximately 1.42%.
- The monthly interest charge is $533.33 multiplied by 1.42%, which is approximately $7.57.
- The portion of the month the charge applies to is 10 days divided by 30 days, which is approximately 0.33.
- The monthly finance charge is $7.57 multiplied by 0.33, which is approximately $2.50.
Therefore, the monthly finance charge for this credit card transaction is approximately $2.50.