- Credit Cards.
- NOTE: I am using the book and my personal experience. Things with
credit cards change more often than other loans AND you need to read the fine print.
- Credit cards would have never worked before computers.
- These computations are tedious, not hard, but we need to do a few.
- Credit cards have two different interest rates
- Rate for Purchases
- Rate for Cash Advance
- A daily rate of 0.04792%
- is actually 0.04792%/day * 365days/year = 17.49% APR
- Note, credit card companies want those extra days.
- Credit cards usually give you a grace period on new purchases
- If the purchase is paid off in this period, it is not charged any interest.
- This is 20-25 days.
- The grace period does not apply to cash advances.
- When you make a payment
- You first pay off any accumulated interest and fees
- Then at least 1% of your balance.
- This the minimum payment
-
- I grabbed this off the web.
- Notice, if they charged nothing else, and had no interest charge, they would pay this off in 20 months.
- But notice, they had a finance charge of $12.28
- We will see more computations here.
- Credit cards use various methods to compute the interest due
- The Previous Balance Method you are charged interest on the previous balance.
- The Average Daily Balance Method requires you to compute the average daily balance
- We will use the previous Balance Method
- Example 21, page 642
Shiing Shen Chern's credit company determines his
minimum monthly payment by adding all new interest to
1% of the outstanding principal. The credit card
company charges an interest rate of 0.039698% per day.
On March 17, Shiing uses his credit card to purchase
airline tickets for his family for $2,600. He makes
no other purchased during March.
A. Assuming Shiing had no new interest determine Shiing's
minimum payment due April 1, his billing date.
2600 % 1% = $26
B. On April 1, instead of making the minimum payment,
Shiing makes a payment of $500. Assuming there are no
additional charges or cash advances, determine Shiing's
minimum payment on May 1.
The new balance is 2600 - 500 = 2100
There are 30 days in April so t = 30 days.
r = 0.039698% per day
i = prt
i = 2100 * 30 * 0.00039698 = $25.01
The bank also wants 1% of the principal
2100 x 1% = 21
So the total payment due is 25.01+21 = 46.01,
which will be rounded up to $47.
C. (I added this one) What if on June 1 Shiing makes
another payment of $500
Before the payment the balance is 2100+25.01 = 2125.01
After the payment the balance is 2125.01 - 500 = 1,625.01
The new interest is
May has 31 days.
i = 1,625.01 * 31 * 0.00039698 = 19.997 = $20.00
1% of the balance is $16.25
The new minimum is 20.00 + 16.25 = 36.25 or $37
- What if Shiing decided to make the minimum payments?
April 1:
He pays $26
Amount Due 2600-26 = 2,574.
May 1:
He must pay interest on the balance (2,574)
for 30 days.
2,574 * 30 * 0.00039698 = 30.65
Plus 1% of the balance 25.74
So his minimum payment is 30.65+25.74 = 56.39
Or $57
balance before payment is 2,574 + 30.65 = 2604.65
Balance after payment 2604.65 - 57 = $25,47.65
June 1:
He must pay interest on the balance ($2547.65)
For 31 days
$2547.65 * 32 * 0.00039698 = 31.35 (he had it a day longer)
Plus 1% of the balance 25.47
So his minimum payment is 31.35 + 25.47 = 56.82 = $57.
Balance before payment is 2547.65 + 31.35 = 2,579
Balance after payment is 2579 - 57 = 2,522.
So he has paid a total of 26 + 57 + 57 = 140
But he has only paid 2600- 2522 = 78 in principal
and 140 - 78 = 62 in interest.
- Take a look at This worksheet
- Example Problem 26 page 643
On September 5, the billing date, Verna Brown
had a balance due of $567.20 on her credit card.
The transactions during the following month were:
September 8 Payment 275.00
September 12 Charge 330.00
September 27 Charge 190.80
October 2 Charge 84.75
A. Find the finance charge on October 5
using the previous balance method. Assume
the rate is 1.1% per month.
567.20 x 0.011 = 6.24
B. Find the new balance
567.20 + 6.24
- 275.00
+ 330.00
+ 190.80
+ 84.75
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903.99