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Different methods for outstanding balance determination

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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. 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'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.

Solution Preview

See the attached file. Thanks

Account Sheet for the Month of November

Date Transaction Transaction Amount Closing Credit Balance No of days Closing credit*no of days
Debit Credit
1-Nov Opening Balance \$600 4.00 \$2,400
5-Nov Purchases Made \$80 \$680 5.00 \$3,400
10-Nov Payments made \$200 \$480 5.00 \$2,400
15-Nov Purchases Made \$100 \$580 15.00 \$8,700
30-Nov Purchases Made \$50 \$630 1.00 \$630
Closing Balance \$630
Total 30.00 \$17,530
Average daily Balance \$584.33 ...

Solution Summary

The solution explains different methods of interest calculation on the credit balance for the MasterCard. The solution is presented both in word format and in Excel format so that one can see the underlying calculations and formulas. The methods discussed are previous balance method, adjusted balance method and average daily balance method.

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