buy now, pay later many people make purchases using credit cards. why might you want to buy...
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Buy Now, Pay Later
Many people make purchases using credit cards.
Why might you want to buy something using a credit card instead of cash?
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Lesson Objective
Compute the finance charge based on the average-daily-balance method–new purchases included.
Content Vocabulary
average-daily-balancemethod average-daily-balance method
Computing the finance charge on a credit account based on the average balance at the end of each day of the billing period.
average-daily-balance method
Computing the finance charge on a credit account based on the average balance at the end of each day of the billing period.
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Aiesha Miller has a charge account where the finance is computed using the average-daily-balance method that includes new purchases. She checks to be sure the average daily balance is correct.
Her account statement is shown in Figure 7.7 below.
Example 1Example 1
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Figure 7.7Figure 7.7
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Figure 7.7 (cont.)Figure 7.7 (cont.)
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Find the sum of daily balances.
Example 1 Answer: Example 1 Answer: Step 1Step 1
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Find the average daily balance.
Sum of Daily Balances ÷ Number of Days
$3,628.50 ÷ 31 = $117.048 or $117.05
Example 1 Answer: Example 1 Answer: Step 2Step 2
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Aiesha Miller (from Example 1) checks the finance charge and the new balance. The finance charge is 2 percent of the average daily balance.
What is the new balance?
Example 2Example 2
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Find the unpaid balance.
Previous Balance – (Payments + Credits)
$125.80 – $70.00 = $55.80
Example 2 Answer: Example 2 Answer: Step 1Step 1
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Find the finance charge.
Average Daily Balance × Periodic Rate
$117.05 × 2% = $2.3418 or $2.34
Example 2 Answer: Example 2 Answer: Step 2Step 2
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Find the new purchases.
$25.85
Example 2 Answer: Example 2 Answer: Step 3Step 3
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Find the new balance.
Unpaid Balance + Finance Charge + New Purchases
$55.80 + $2.34 + $25.85 = $83.99
Example 2 Answer: Example 2 Answer: Step 4Step 4
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Deepak Sankaran received his credit card statement for the billing period of 7/15 to 8/14.
His previous balance was $820.47. His payment of $600 was posted on 7/22. On 8/4 new purchases of $144.39 were posted.
No other transactions occurred during the billing period. The finance charge is 1.25 percent of the average daily balance.
Practice 1Practice 1
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What is the average daily balance?
What is the finance charge?
What is the new balance (new purchases included)?
Practice 1 (cont.)Practice 1 (cont.)
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Average daily balance: $407.19
Finance charge: $5.09
New balance: $369.95
Practice 1 AnswerPractice 1 Answer