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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 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'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 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? Explain.

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    Solution Preview

    The question is calling for a balance calculated by three different methods of applying interest then determine which would be best option if Nancy could choose.

    The first method calls for use of the APR (Annual percentage rate) on a 30 day billing period using the average daily balance method.

    so first determine the average daily balance. This is a simple average of the balance on every day of the month added together then divided by 30 (number of ...

    Solution Summary

    This post describes three methods for calculating interest on a revolving account such as a credit card. Examples are demonstrated for the Average Daily Balance Method (ADR) and the, the Adjusted Balance Method, and the Previous Balance Method. Reccomendation follow for selecting appropriate methods.