Average Daily Balance Method

[BreedingtheSpawn]

On the April 2 billing date, Monica had a balance due of $1639.74 on her credit card. The transactions during the following month were:

April 4 Charge Textbooks $381.99
April 7 Payment $140.23
April 19 Charge Gasoline $29.52
April 21 Charge Fertilizer $29.66

The interest rate on the card is 1.6% per month. Using the average daily balance method, find the finance charge on May 2 (April has 30 days).

$30.45
$28.93
$30.47
$30.61

Any help on this problem would be greatly appreciated.

 

[tkhunny]

You are going to have to come to terms with "Beginning of Day" vs. "End of Day". It is hoped that you have discussed this in class, since it is nowhere in the problem statement. I am inclined to think we are looking at "End of Day" values. This has several implications:

1) We do NOT count the FIRST day of the billing cycle. That was the last day of the previous billing cycle.
2) Obviously, then, we DO count the LAST day int he billing cycle.
3) Charges and payments do not actyually get into the balance until the day AFTER the transaction.

Think of it as each day saving up everything and magically occuring at midnight at the end of the day.

4/3/ Stays at 1639.74
4/4/ Stays at 1639.74
4/5/ Jumps to 2021.73
...
5/2/2010 comes in at 1940.68

Add and divide by 30. I get 1903.07 (Actually, this is a rounded value. You would have to check very specific contract language to know if they round a specific way for this value.)

You do the rest.

Note: If you are off one day, as in, start with only one day at 1639.74, you will get a different answer in the list. Guess what that answer is? It is the result using the "Beginning of Day" assumption.

 

[Denis]

I got 30.45 ; but had to use 360 days : daily = .016 * 12 / 360
Balances ; days
1639.74 ; 2
2021.73 ; 3
1881.50 ; 12
1911.02 ; 2
1940.68 ; 11