Final answer:
The average daily balance on the credit card, given the starting balance and subsequent transactions, is calculated to be $183.33.
Step-by-step explanation:
Calculating the Average Daily Balance
To calculate the average daily balance on a credit card that charges interest using the average daily balance method, you need to take into account the balance each day and any charges or payments that are made within the billing cycle. We have a credit card account with a $1,000 credit limit and a 12.25% interest rate. Assuming a 30-day month, let’s calculate the average daily balance given the following transactions: A starting balance of $200 on day 1, a charge of $50 on day 5, which begins the next day (day 6), and a payment of $150 on day 15, which also begins the next day (day 16).
Days 1-5: $200 balance (5 days)
Days 6-14: $250 balance (9 days, after the $50 charge on day 5)
Days 15-30: $100 balance (16 days, after the $150 payment on day 15)
Total days: 30 days in the month
The average daily balance is calculated as follows:
[(5 days * $200) + (9 days * $250) + (16 days * $100)] / 30 total days
So, the average daily balance equals:
(($1,000 + $2,250 + $1,600) / 30)
The average daily balance is $183.33.
Understanding your credit card's average daily balance is crucial for managing finances and minimizing interest charges. Always be aware of how transactions affect your balance to keep interest costs as low as possible.