Question

Jason’s credit card has an APR of 17.02% and a 30-day billling cycle. The following table details Jason’s transactions with that card in the month of June.

Date
Amount ($)
Transaction
6/1
746.28
Beginning balance
6/9
140.00
Payment
6/15
28.76
Payment
6/18
69.49
Purchase

Between the adjusted balance method and the daily balance method, which method of computing Jason’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 $1.02 greater than the adjusted balance method.
b.
The daily balance method will have a finance charge $0.03 greater than the adjusted balance method.
c.
The adjusted balance method will have a finance charge $2.36 greater than the daily balance method.
d.
The adjusted balance method will have a finance charge $1.37 greater than the daily balance method.

Answer 1

Answer: a.

Work (short):
- Adjusted balance = 746.28 − 140 − 28.76 = 577.52
Finance charge (adjusted) = 577.52 × (0.1702/12) = 577.52 × 0.0141833333 = $8.19

- Daily balances (assume transactions post on their dates):
6/1–6/8 (8 days) at 746.28 → 8×746.28 = 19,751.61 partial sum …
(Detailed: 8 days ×746.28 = 5970.24; 6 days ×606.28 = 3637.68; 3 days ×577.52 = 1732.56; 13 days ×647.01 = 8411.13; sum = 19,751.61)
Finance charge (daily) = (sum of daily balances) × (APR/365) = 19,751.61 × 0.1702 / 365 = $9.21

Difference = 9.21 − 8.19 = $1.02 (daily balance method is $1.02 greater).