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 (rounded to cents)

- Previous balance method: finance charge = 1,998.11 * (13.59%/12)
= 1,998.11 * 0.011325 ≈ $22.63

- Daily balance method:
Daily balances:
- 11/1–11/4 (4 days): 1,998.11
- 11/5–11/15 (11 days): 2,041.97
- 11/16–11/22 (7 days): 1,816.97
- 11/23–11/30 (8 days): 1,878.18
Sum of daily balances = 58,198.34 → average daily balance = 58,198.34/30 ≈ 1,939.94
Finance charge = average daily balance * APR * (30/365)
= 1,939.94 * 0.1359 * (30/365) ≈ $21.67

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