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

Use the previous balance (monthly) rate vs the daily periodic rate.

1) Previous-balance method
Monthly rate = APR/12 = 0.1359/12 = 0.011325.
Finance charge = 1,998.11 × 0.011325 = $22.63.

2) Daily-balance method
Daily rate = APR/365 = 0.1359/365 = 0.00037260274.
Daily balances (days in effect):
- 11/1–11/4 (4 days): 1,998.11 → 4×1,998.11 = 7,992.44
- 11/5–11/15 (11 days): 2,041.97 → 11×2,041.97 = 22,461.67
- 11/16–11/22 (7 days): 1,816.97 → 7×1,816.97 = 12,718.79
- 11/23–11/30 (8 days): 1,878.18 → 8×1,878.18 = 15,025.44
Sum of daily balances = 58,198.34.
Finance charge = 58,198.34 × daily rate = 58,198.34 × 0.00037260274 ≈ $21.68.

Difference = $22.63 − $21.68 ≈ $0.95 (about $0.96 rounded as in the choices).

Answer: (c) The previous balance method will have a finance charge $0.96 greater than the daily balance method.