Andrew is on a 30-day billing cycle. His credit card has an APR of [tex]$16.60 \%$[/tex] and computes finance charges using the previous balance method. The table below shows transactions that Andrew made in March. Based on the information in the table, what will Andrew's March finance charge be?
| Date | Amount ($) | Transaction |
| :----- | :--------- | :---------------- |
| 3/1 | 1,794.30 | Beginning balance |
| 3/6 | 440.15 | Purchase |
| 3/9 | 35.65 | Purchase |
| 3/22 | 250.00 | Payment |
| 3/25 | 51.71 | Purchase |
A. [tex]$46.07[/tex]
B. [tex]$28.66[/tex]
C. [tex]$21.36[/tex]
D. [tex]$2482[/tex]
Answer (1)
Calculate the periodic interest rate: 365 0.1660 × 30 = 0.0136438 .
Multiply the previous balance by the periodic interest rate: $1 , 794.30 × 0.0136438 = $24.48 .
The finance charge for March is $24.48 .
The final answer is $24.48 .
Explanation
Understanding the Previous Balance Method Andrew's credit card company calculates finance charges using the previous balance method. This means the finance charge is calculated based on the balance at the beginning of the billing cycle. In this case, the beginning balance on March 1st is $1,794.30.
Calculating the Periodic Interest Rate The APR (Annual Percentage Rate) is 16.60%. To find the monthly interest rate (or the periodic interest rate), we need to divide the APR by the number of days in a year and then multiply by the number of days in the billing cycle. So, the periodic interest rate is calculated as follows: P er i o d i c I n t eres t R a t e = 365 A PR × N u mb er o f d a ys in bi ll in g cyc l e P er i o d i c I n t eres t R a t e = 365 0.1660 × 30 P er i o d i c I n t eres t R a t e = 0.00045479 × 30 P er i o d i c I n t eres t R a t e = 0.0136438
Calculating the Finance Charge Now that we have the periodic interest rate, we can calculate the finance charge by multiplying the previous balance by the periodic interest rate: F inan ce C ha r g e = P re v i o u s B a l an ce × P er i o d i c I n t eres t R a t e F inan ce C ha r g e = $1 , 794.30 × 0.0136438 F inan ce C ha r g e = $24.48
Final Answer Therefore, Andrew's March finance charge will be approximately $24.48.
Examples
Understanding credit card finance charges is crucial for managing personal finances. For example, if you carry a balance of $1000 on a credit card with an APR of 20% and only make minimum payments, you'll end up paying significantly more than $1000 due to the accumulated interest. Knowing how finance charges are calculated helps you make informed decisions about spending and paying off your balances, potentially saving you a lot of money in the long run. This calculation is also useful when comparing different credit card offers to determine which one has the lowest finance charges based on your spending habits.
