SECTION 7-4 Finance Charge: Average-Daily-Balance

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Presentation transcript:

SECTION 7-4 Finance Charge: Average-Daily-Balance Method (New Purchases Included) pp. 268-272

Section Objective Compute: finance charge based on the average-daily-balance method where new purchases are included

Formulas Average Daily Balance = Sum of Daily Balances ÷ Number of Days Finance Charge = Average Daily Balance × Periodic Rate New Balance = Unpaid Balance + Finance Charge + New Purchases

A Financial Gem? p. 268 If you had a choice between paying a finance charge based on your average daily balance with or without new purchases, which one would you pick, and why?

Example 1 Aiesha Miller has a charge account where the finance is computed using the average-daily-balance method that includes new purchases. She checks to be sure the average daily balance is correct. Her account statement is shown in Figure 7.7 below.

Figure 7.7

Figure 7.7 (cont.)

Example 1 Answer: Step 1 Find the sum of daily balances.

Example 1 Answer: Step 2 Find the average daily balance. Sum of Daily Balances ÷ Number of Days $3,628.50 ÷ 31 = $117.048 or $117.05

Example 2 Aiesha Miller (from Example 1) checks the finance charge and the new balance. The finance charge is 2 percent of the average daily balance. What is the new balance?

Example 2 Answer: Step 1 Find the unpaid balance. Previous Balance – (Payments + Credits) $125.80 – $70.00 = $55.80

Example 2 Answer: Step 2 Find the finance charge. Average Daily Balance × Periodic Rate $117.05 × 2% = $2.3418 or $2.34

Example 2 Answer: Step 3 Find the new purchases. $25.85

Example 2 Answer: Step 4 Find the new balance. Unpaid Balance + Finance Charge + New Purchases $55.80 + $2.34 + $25.85 = $83.99

Practice 1 Deepak Sankaran received his credit card statement for the billing period of 7/15 to 8/14. His previous balance was $820.47. His payment of $600 was posted on 7/22. On 8/4 new purchases of $144.39 were posted. No other transactions occurred during the billing period. The finance charge is 1.25 percent of the average daily balance.

Practice 1 (cont.) What is the average daily balance? What is the finance charge? What is the new balance (new purchases included)?

Practice 1 Answer Average daily balance: $407.19 Finance charge: $5.09 New balance: $369.95

END OF SECTION 7-4 Finance Charge: Average-Daily-Balance Method (New Purchases Included)

Homework: 1-7; 11-18 and then pick up section 7-3 and 7-4 worksheets