Question

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?
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.

Answer 1

Answer: c.

Work (assumes each transaction posts the same day and the daily balance is the end‑of‑day balance):

1) Previous balance method
- Finance charge = beginning balance × (APR/12)
- = 1998.11 × (0.1359/12) = 1998.11 × 0.011325 = $22.63 (rounded)

2) Daily balance method
- Daily balances:
- 11/1–11/4 (4 days): 1998.11
- 11/5–11/15 (11 days): 1998.11 + 43.86 = 2041.97
- 11/16–11/22 (7 days): 2041.97 − 225 = 1816.97
- 11/23–11/30 (8 days): 1816.97 + 61.21 = 1878.18
- Sum of daily balances = 58,198.34 → average daily balance = 58,198.34/30 = 1,939.945
- Daily rate = APR/365 = 0.1359/365; finance charge = (sum of daily balances) × (APR/365)
= 58,198.34 × (0.1359/365) ≈ $21.67

Difference = $22.63 − $21.67 ≈ $0.96. So the previous balance method yields a $0.96 greater finance charge.