7
QuizMultiple Choice

Finance Charges

Question 7 • FowU - Financial Math - B

David has a credit card with an APR of 13.59% and a 30-day billing cycle. The table below details David’s transactions with that credit card in the month of November. Date Amount ($) Transaction 11/1 1,998.11 Beginning balance 11/5 43.86 Purchase 11/16 225.00 Payment 11/23 61.21 Purchase Between the previous balance method and the daily balance method, which method of calculating David’s November finance charge will result in a greater finance charge, and how much greater will it be?

Answer
A
The daily balance method will have a finance charge $1.59 greater than the previous balance method.
B
The daily balance method will have a finance charge $0.40 greater than the previous balance method.
C
The previous balance method will have a finance charge $0.96 greater than the daily balance method.
D
The previous balance method will have a finance charge $2.55 greater than the daily balance method.

Explanation

The previous balance method uses the November 1 balance: $1,998.11 × (13.59% ÷ 12) ≈ $22.63. For the daily balance method, the balances are $1,998.11 for 4 days, $2,041.97 for 11 days, $1,816.97 for 7 days, and $1,878.18 for 8 days. Their 30-day average is about $1,939.94, giving a finance charge of about $21.67 using the daily rate. The previous balance method is therefore about $0.96 greater, matching choice C.

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