Question

Yvonne's credit card has an APR of 17.79% and a 30-day billing cycle. The following table details her credit card transactions in the month of June.

Date
Amount ($)
Transaction
6/1
925.43
Beginning balance
6/7
62.74
Payment
6/11
28.27
Purchase
6/21
50.00
Purchase

Between the previous balance method and the daily balance method, which method of calculating Yvonne's June finance charge will result in a greater finance charge, and how much greater will it be?
a.
The daily balance method will have a finance charge $0.21 greater than the previous balance method.
b.
The daily balance method will have a finance charge $0.53 greater than the previous balance method.
c.
The previous balance method will have a finance charge $0.45 greater than the daily balance method.
d.
The previous balance method will have a finance charge $0.40 greater than the daily balance method.

Answer 1

Compute the two finance charges.

APR = 17.79% → daily rate = 0.1779/365 = 0.00048767123. Billing days = 30.

Previous-balance method:
Finance charge = previous balance × daily rate × 30
= 925.43 × 0.00048767123 × 30 ≈ $13.54.

Daily-balance method:
Daily balances:
- 6/1–6/6 (6 days) at 925.43 → 6×925.43 = 5552.58
- 6/7–6/10 (4 days) at 862.69 → 4×862.69 = 3450.76
- 6/11–6/20 (10 days) at 890.96 → 10×890.96 = 8909.60
- 6/21–6/30 (10 days) at 940.96 → 10×940.96 = 9409.60
Sum of daily balances = 27,322.54

Finance charge = sum daily balances × daily rate
= 27,322.54 × 0.00048767123 ≈ $13.33.

Difference = $13.54 − $13.33 ≈ $0.21.

So the previous-balance method produces the larger finance charge by about $0.21. (None of the answer choices exactly state that wording; the magnitude $0.21 appears in choice (a), but that choice reverses which method is larger.)