Open End Installment Loans

• Credit cards represent "Revolving Credit"
• You can borrow more money as you pay the old loan off.
• Interest is calculated with i=Prt
• But it is calculated once per month.
• So we need to change APR to MPR
• This is simple, just divide by 12.
• Example: from CreditRatings.com

  The Discover More card charges 10.99% to 18.99% depending on credit rating.
  
  Assume they charg 10.99%.  What is the monthly interest rate?
  
  .1099/12 = .916%
      

• Interest is calculated a number of ways.
• The unpaid balence method
  • Find the balence at the ending of the period.
  • Subtract any payments.
  • Multiply this by the monthly interest rate.
  • Example:

    Look at problem 16, page 489
    Balence: 425
    Payment:  75
    Unpaid Balence ($425-$75) = $350
    Interst Due  = 350*.0175 = 6.13
    Total Balence Due: 350+6.13+45+75 = 478.13
    
    The minimum payment is given in the chart: $40
    	

• The previouis balence method
  • Interest is paid on the balence at the beginning of the period
  • Example: Repeat the previous problem with this method

    Balence: 425
    Payment:  75
    Interst Due  = 425*.0175 = 7.44
    Total Balence Due: 425 - 75 + 7.44 + 45 + 75 = 479.44
    
    The minimum payment is given in the chart: $40
    	

• The daily average balence method is much more common.
  • Find the daily average balence for the month.
  • Same Example:

    Same example, assume groceries were charged on the 15
    Assume Clothing was charged on the 20
    
    Starting Balence 425
    Day 1 through 5 : 424X5 = 2,125   (5 days)
    Day 6 payment received, new balance 350
    Day 6 through 14: 350 x 9 = 3,150 (9 days)
    Day 15 New Balence (350+45) = 395
    Day 15 through 19: 395 x 5 = 1,975 (5 days)
    Day 20 New Balence 395 + 77 472
    Day 20 through 30: 472x11  = 5,192  (11 days)
    Daily average Balence 
       (2,125+3,150+1,975+5,192)/30 = 12,442/30
                                    = 414.73
    
    New Interest   414.73x .0175 = 7.26
    New Balence = 470+7.26 = 477.26 
    	

  • Some credit cards offer a grace period on new purchases if the balence is paid in full.

Homework