2. Credit Cards September 23, 2011
Credit Card:
preapproved credit used to purchase now and pay later
Credit Card Responsibility:
use it if you can pay it off
pay more than minimum balance to pay off quickly
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3. Credit Cards September 23, 2011
Finance Charge
Finance Charge per $100 = (Finance charge/ amount financed) *100
The finance charge for a 6month, $1200 installment loan is $72.
Find the annual % rate on the loan.
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4. Credit Cards September 23, 2011
Interest Rates: APR (annual percentage rate)
Credit card interest is compounding (interest is added each month based
on amount of principal).
How long would it take you to pay off the purchase without interest?
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5. Credit Cards September 23, 2011
APR = 24F F = finance charge
P(n+1) P = original principal, n = # of payments per year
Find the APR for a finance charge of $5.75 per $100 for 9 payments.
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8. Credit Cards September 23, 2011
Previous Balance Method
charges interest on the balance in the account on the last
billing date of the previous month. Any credits in current month
are not included.
Finance charge = previous balance * periodic rate
New balance = previous balance + (finance charge + new purchases + fees) (payments + credits)
Laura's card company uses the previous balance method.
The monthly periodic rate is 1.5% and 18% APR. Her previous balance was $225.60.
This month she purchased shoes for $128.99, gas for 21.89, dinner for $27.79.
She returned a pair of shoes for $35.99 and made a payment of $75.00.
Find the finance charge for the month and the new balance.
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9. Credit Cards September 23, 2011
Adjusted Balance Method
subtracts payments and credits during this month from the
balance at the end of the previous month. Purchases and fees
in current month are not included.
Adjusted balance = previous balance (payments + credits)
Finance charge = adjusted balance * periodic rate
New balance = adjusted balance + finance charge + new purchases and fees
Laura's card company uses the adjusted balance method.
The monthly periodic rate is 1.5% and 18% APR. Her previous balance was $225.60.
This month she purchased shoes for $128.99, gas for 21.89, dinner for $27.79.
She returned a pair of shoes for $35.99 and made a payment of $75.00.
Find the finance charge for the month and the new balance.
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10. Credit Cards September 23, 2011
Average Daily Balance Method (ADB)
total of the balance at the end of each day during a period
divided by the number of days in the period.
Daily Balance = Beginning balance (payments + credits) + (purchases + fees)
ADB = sum of daily balances / # of days in billing period
Finance Charge = ADB * monthly periodic rate
New Balance = Beginning balance (payments + credits) + (finance charges + new purchases + fees)
Laura's card company uses the average daily balance method.
The monthly periodic rate is 1.5% and 18% APR. Her previous balance was $225.60.
This month she purchased shoes for $128.99 on the 4th, gas for 21.89 on the 9th, dinner for
$27.79 on the 12th.
She returned a pair of shoes for $35.99 on the 18th and made a payment of $75.00 on the 24th.
Find the finance charge for the month and the new balance.
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13. Credit Cards September 23, 2011
Average Daily Balance
The Average Daily Balance is the total of the balance at the end of each day during a period divided
by the number of days in the period.
Average Daily Balance, or ADB, is often used to calculate periodic interest charges by multiplying
the periodic interest rate by the average daily balance. The most common period used for this type of
calculation is monthly, which can either be a rolling 30 day period, or an actual calendar month. The
most common use of Average Daily Balance for typical consumers is credit cards that calculate
monthly finance charges based on the average daily balance, although some only do this if the
balance from the prior month is not paid in full by the due date.
Example of Average Daily Balance
The method for finding the Average Daily Balance is illustrated in the chart below. In this example,
let's assume the following:
* Starting balance on Jan 1: $1,987.65
* Period length: 7 days
* Purchases:
o Jan 2: $256.78
o Jan 5: $ 78.99
o Jan 7: $ 22.21
* Payments:
o Jan 4: $497.15
o Jan 7: $800.00
Starting with the starting balance, add the purchases and subtract the payments for each day to find
that day's balance. Be sure to include all the days in the period, even those with no transaction
activity. Add these daily balances (in this case, seven of them) and divide by the number of days in
the period (in this case, seven) to find the Average Daily Balance.
Date
Purchases
Payments
Balance
Jan 01 $ 1,987.65
Jan 02 $256.78 $ 2,244.43
Jan 03 $ 2,244.43
Jan 04 $497.15 $ 1,747.28
Jan 05 $ 78.99 $ 1,826.27
Jan 06 $ 1,826.27
Jan 07 $ 22.21 $800.00 $ 1,048.48
Total of Daily Balances: $12,924.81
Number of Days: 7
Average Daily Balance: $1,846.40
As you can see, making payments earlier can reduce your overall Average Daily Balance. This, in
turn, will reduce your interest payments.
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14. Credit Cards September 23, 2011
Calculating the Average Daily Balance
Let’s say your APR is 12% and your billing cycle is 25 days long.
You started the billing cycle with a balance of $100. On Day 4, you made a $100 purchase. On
Day 20, a $25 payment was credited to your account. Your daily balance during the billing cycle
was:
Day 1 – 3: $100
Day 4 – 20: $200 ($100 purchase)
Day 20 – 25: $175 ($25 credit)
To calculate your average daily balance you must total your balance from each day in the billing
cycle and divide by the number of days in the cycle.
(Day 1 Balance + Day 2 Balance + Day 3 Balance…) / number of days in billing cycle
$4575 / 25 = $183
Calculating the Average Daily Balance Finance Charge
Based on the details listed above, your finance charge using the average daily balance method
would be:
$183 * .12 * 25 / 365 = $1.50
If you continued making minimum payments and no additional charges on this account, you'd pay
$18.00 in finance charges over the course of a year.
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15. Credit Cards September 23, 2011
On Friday you had a balance of $52 on your credit card.
On Monday you spent $17 from your credit card.
On Wednesday you spent $24.
Find your average daily balance for one week, (7days)
starting from Friday.
* Starting balance on Jan 1: $1,987.65 APR 22%
* Period length: 7 days
* Purchases:
o Jan 2: $256.78
o Jan 5: $ 78.99
o Jan 7: $ 22.21
* Payments:
o Jan 4: $497.15
o Jan 7: $800.00
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16. Credit Cards September 23, 2011
You Opened a Credit Card in January. You paid your
balance in full for January and February, and in March
you left $100 not paid. You make the following
purchases and payments.
March 29 April 27
Purchases
March 31 $25.40 Quik Trip
April 1 $56.70 Macy's
April 9 $11.56 Hong Kong Inn
April 14 $31.42 Conoco
April 17 $107.23 Best Buy
April 20 $7.43 ChickfilA
April 24 $23.68 Dillards
Payments
April 27 $45.00
Find the Average Daily Balance
Find the Finance Charges
Find the beginning balance for the next Statement
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17. Credit Cards September 23, 2011
New Statement
April 28 May 27
Purchases
May 3 $75.00
May 12 $32.63
Payments
May 26 $30.00
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18. Credit Cards September 23, 2011
For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest
charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date
of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder
agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial
institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved.
Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB)
divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was
made on the account.
Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was
made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been
made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact
the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the
balance stopped revolving).
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