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Personal Finance



Personal Finance Nancy Tai has recently opened a revolving charge account with MasterCard. Her credit limit is $1000, but she has not charged that much since opening the account. Nancy hasn’t had the time to review her monthly statements as promptly as she should, but over the upcoming weekend, she plans to catch up on her work. In reviewing November’s statement, she notices that her beginning balance was $600 and that she made a $200 payment on November 10. She also charged purchases of $80 on November 5, $100 on November 15, and $50 on November 30. She can’t tell how much interest she paid in November because she spilled watercolor paint on that portion of the statement. She does remember, though, seeing the letters APR and the number 24%. Also, the back of her statement indicates that interest was charged using the average daily balance method including current purchases, which considers the day of a charge or credit. 1. Assuming a 30-day period in November, calculate November’s interest using the average daily balance method. Also, calculate the interest Nancy would have paid with: a) the previous balance method, b) the adjusted balance method. 2. Going back in time, when Nancy was just about to open her account, and assuming she could choose among credit sources that offered different monthly balance determinations, and assuming further that Nancy would increase her outstanding balance over time, which credit source would you recommend? Explain. SHOW ALL WORK FOR EACH ASSIGNMENT AND EXPLAIN EACH STEP CAREFULLY. Introduction Credit card is become essential part of the life. Nowadays, every person uses credit card. NANCY Tai is individual. She has credit card. The bank charges 24% interest on credit amount. The bank uses daily average balance method. She is little bit lazy, that is why she does not review that bank statement. She is not too much worried about interest calculation. As a rational consumer’s point of view, she should analysis the bank statement. Calculation of interest As it is above mentioned, bank uses daily average balance method for calculating of interest amount. The opening balance of credit card is $600. The interest rate is 24%. The balance is due for 4 days. It means the total amount is due for 4 days is $2400 (600*4). On the 5 Nov, she made transaction to buy something. The value of transaction is $80. So, the balance of card is $680. This amount is due for 5 days. This process is same for other transactions. After calculating the total amount of credit using, It is divided by 30. The result of this calculation is $584.33. The interest amount will be $11.69 (24%/12* 584.33, 24% is annual interest rate and monthly interest rate will be 2% = 24%/12). Previous Balance Method It is also prominent method of interest calculation on credit card. In this method of interest calculation, the previous balance is core amount. The interest is calculated on the previous balance of credit card. The previous balance of Nancy’s credit card is $600. The interest rate is 24%. Thus, interest will be ((24/100)/12)*600 = $12 The interest amount is $.37 more than average daily method interest amount. Here, $600 is previous balance of card. 24% is annual rate of return. Firstly, 24% is divided by 100 for getting decimal point of interest. After that it is divided for getting monthly rate and finally it is multiplied with previous balance. Adjusted Balance Method This method is also prominent method for interest calculating. It is simple and easiest method. An individual can calculate interest easily. Below mentioned factors are essential requirements of this method: • Opening Balance : $600 • Payment Made: $ 200 • Closing Balance: $400 (600-200) • Monthly Interest Rate :2% (24/12) Under this method, the interest amount is calculated over the opening balance subtracted from the payment made. According to above mentioned data, opening balance of credit card is $60


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