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Strategy for revolving charge account with MasterCard

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Nancy Tai has recently opened a revolving charge account with MasterCard. Her credit limit is $1000, but she has not charged that much since opening the account. Nancy hasn't had the time to review her monthly statements promptly as she should, but over the upcoming weekend she plans to catch up on her work.
In reviewing October's statement she notices that her beginning balance was $600 and that she made a $200 payment on November 10. She also charged purchases of $80 on November 5, $100 on November 15, and $50 on November 30. She can't tell how much interest she paid in November because she spilled watercolor paint on that portion of the statement. She does remember, though, seeing the letters APR and the number 16%. Also, the back of her statement indicates that interest was charged using the average daily balance method, including current purchases, which considers the day of a charge or credit.

1. Assuming a 30-day period in November, calculate November's interest. Also calculate the interest Nancy would have paid with: a) the previous balance method, b) the adjusted balance
method.

2. Going back in time when Nancy was just about to open her account, and assuming she could choose among credit sources that offered different monthly balance determinations, and assuming further that Nancy would increase her outstanding balance over time, which credit source would you recommend? Explain.

3. In talking with Nancy, you have learned that she can also get credit through her credit union. An advertisement from the union shows that Nancy could take a personal cash loan at 14% on a discount basis or an installment loan at 12% add-on. Each is a one-year loan. Would you advise Nancy to use one of these to pay off her November balance with MasterCard? (Assume the 14 and 12%s are not APRs.) Nancy doesn't believe she will have enough funds to reduce the November balance until the end of next October.

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The solution contains detailed explanation of some strategies for revolving charge account with MasterCard.

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1. From what you provided, we know that Nancy loaned $400 in October, and $430 in November. If the monthly loan interest rate is 16%, then the ...

Solution provided by:
Changping Wang, MA
Education
  • BSc , Wuhan Univ. China
  • MA, Shandong Univ.
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  • "Your solution, looks excellent. I recognize things from previous chapters. I have seen the standard deviation formula you used to get 5.154. I do understand the Central Limit Theorem needs the sample size (n) to be greater than 30, we have 100. I do understand the sample mean(s) of the population will follow a normal distribution, and that CLT states the sample mean of population is the population (mean), we have 143.74. But when and WHY do we use the standard deviation formula where you got 5.154. WHEN & Why use standard deviation of the sample mean. I don't understand, why don't we simply use the "100" I understand that standard deviation is the square root of variance. I do understand that the variance is the square of the differences of each sample data value minus the mean. But somehow, why not use 100, why use standard deviation of sample mean? Please help explain."
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