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    calculate the average balance

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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 has not had the time to review her monthly statements as promptly as she should, but over the upcoming weekend, she plans to catch up on her work.

    In reviewing November'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 not 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 24%. 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.

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

    Please show all the work and explain each step carefully.

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    Solution Preview

    To calculate the interest using the average daily balance method, first calculate the number of days each for each balance. I have done this in the attached excel file.

    Next, to calculate the average balance, we use a weighted average using the number of days for each balance and divide by the total number of days in the month (30). I have done this in the Excel file and found the average daily balance to be $584.33.

    At a ...

    Solution Summary

    Using the average daily balance method, this solution finds interest.