Question

The balance on a credit card, that charges a 10.5%

APR interest rate, over a 1 month period is given in
the following table:
Days 1-3: $150 (initial balance)
Days 4-20: $200 ($50 purchase)
Days 21-30: $50 ($150 payment)
What is the finance charge, on the average daily
balance, for this card over this 1 month period?
finance charge = $ [?]
Round to the nearest hundredth.
Enter

Answer 1

The finance charge on a credit card with a 10.5% APR interest rate is calculated using the average daily balance. For the given scenario, the average daily balance is $145, and when multiplied by the monthly interest rate of 0.875%, the finance charge comes out to approximately $1.27 for the month.

Step-by-step explanation:

To calculate the finance charge on a credit card with a 10.5% APR interest rate, you need to calculate the average daily balance and then apply the interest rate to this average balance for the 1 month period. To do this:

• Days 1-3: $150 balance for 3 days
• Days 4-20: $200 balance for 17 days (after a $50 purchase)
• Days 21-30: $50 balance for 10 days (after a $150 payment)

Average Daily Balance = [(150 x 3) + (200 x 17) + (50 x 10)] / 30

The APR is annual, so to get the monthly rate, divide by 12:

Monthly Interest Rate = 10.5% / 12

Now, apply the monthly rate to the average daily balance to find the finance charge:

Finance Charge = Average Daily Balance x (Monthly Interest Rate)

Plugging in the values:

Average Daily Balance = (450 + 3400 + 500) / 30 = 4350 / 30 = $145

Monthly Interest Rate = 10.5% / 12 = 0.875% per month

Finance Charge = $145 x (0.875 / 100) ≈ $1.27

Therefore, the finance charge for the month would be approximately $1.27, rounded to the nearest hundredth.