Question

Gregory has a credit card with a 30-day billing cycle and an APR of 11.95%. The following table shows Gregory’s credit card transactions for the month of April.

Date
Amount ($)
Transaction
4/1
622.82
Beginning balance
4/4
45.45
Payment
4/10
78.91
Purchase
4/25
16.36
Purchase

Between the adjusted balance method and the daily balance method, which method of computing Gregory’s April 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 $0.09 greater than the adjusted balance method.
b.
The daily balance method will have a finance charge $0.54 greater than the adjusted balance method.
c.
The adjusted balance method will have a finance charge $1.40 greater than the daily balance method.
d.
The adjusted balance method will have a finance charge $0.86 greater than the daily balance method.

Answer 1

Answer: b.

Work:
- Adjusted balance: adjusted = 622.82 − 45.45 = 577.37. Monthly rate = 11.95%/12 = 0.00995833. Finance charge = 577.37(0.00995833) ≈ $5.75.

- Daily balance: day-by-day balances:
- 4/1–4/3 (3 days): 622.82
- 4/4–4/9 (6 days): 577.37
- 4/10–4/24 (15 days): 656.28
- 4/25–4/30 (6 days): 672.64
Sum of daily balances = 19,212.72, average daily balance = 19,212.72/30 = 640.424.
Daily rate = 11.95%/365, finance charge = 640.424 × 0.1195 × (30/365) ≈ $6.29.

Difference = $6.29 − $5.75 ≈ $0.54, so the daily balance method yields $0.54 more.