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MTH 120 - Calculating Credit Card Interest using Average Daily Balance Method

# MTH 120 - Calculating Credit Card Interest using Average Daily Balance Method

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Unformatted text preview: Example : Calculating Monthly Interest and New Balance for a Credit Card using the Average Daily Balance Method Calculate the monthly interest and the new balance at the end of the month for a credit card with an APR of 18% that uses the average daily balance method having a balance of \$1,000.00 on March 1 if you made a \$100 00 paymen tha wa received and recorded e posted on March 10 you made a \$100.00 payment that was received and recorded, i.e., posted, on March 10. First, let’s assume the credit card company posts payments only after first accruing daily interest. Now, let’s calculate the interest charged from March 1 to March 10, i.e., the date your payment posted using I 10 = P 10 r 10 t 10 , then let’s calculate the interest charged from March 11 to March 31 using I 21 = P 21 r 21 t 21 . Since the balance from March 1 to March 10 is \$1,000.00… P 10 = 1,000 Since the credit card company uses the average daily balance method… r 10 = APR / 365 = 0.18 / 365 = 0.0004931506… Let’s use 5 significant digits… r 10 = 0.00049315 Since we assumed the credit card company posts payments after accruing daily interest; therefore…...
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MTH 120 - Calculating Credit Card Interest using Average Daily Balance Method

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