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adjusted balance method

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 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.

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.
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

Please check the attached Excel file for the calculations.

In order to calculate the interest under the average daily balance method, we need to calculate how many days each balance lasted. For example, since the opening balance (on November 1st) was $600, and the first purchase (for $80) was on Novemeber 5th, then Nancy had a balance of $600 for 4 days. We calculate the same for the next balances after the purchases and payments are made, as in the Excel file.

Next, in order to calculate the average balance, we use a weighted ...

Solution Summary

The adjusted balance method is considered.