Question

Ron did not pay his credit card bill in full last month. He wants to pay it in full this month. On this month’s bill, there is a mistake in the average daily balance. The credit card company lists the average daily balance on his bill as $510. 50. Ron computed it himself and found that it is $410. 50.

The APR is 18%.


a. What finance charge did the credit card company compute on Ron’s bill?

b. If Ron’s average daily balance is correct, what should the finance charge be?

Answer 1

To compute the finance charge, find the difference between the credit card company's average daily balance and Ron's computed average daily balance. The finance charge is then calculated by multiplying this difference by the APR and dividing by 365. The credit card company mistakenly computed a finance charge of $0.49, while the correct finance charge should be $2.04 based on Ron's average daily balance.

Step-by-step explanation:

To compute the finance charge, we need to find the difference between the credit card company's average daily balance and Ron's computed average daily balance. The finance charge is then calculated by multiplying this difference by the APR and dividing by 365 (since the APR is an annual rate). Let's calculate:

Difference in average daily balance = Credit card company's average daily balance - Ron's computed average daily balance = $510.50 - $410.50 = $100

Finance charge = (Difference in average daily balance * APR) / 365 = ($100 * 18%) / 365 = $0.4931507

Therefore, the finance charge computed by the credit card company is $0.49.

If Ron's average daily balance is correct, the finance charge should be calculated as follows:

Finance charge = (Ron's computed average daily balance * APR) / 365 = ($410.50 * 18%) / 365 = $2.0376712