SECTION 7-3 Finance Charge: Average-Daily-Balance pp

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SECTION 7-3 Finance Charge: Average-Daily-Balance pp. 264-267 Method (No New Purchases Included)

Section Objective Calculate: finance charge based on the average-daily-balance method where no new purchases are included

Key Words to Know average-daily-balance method (p. 264) Computing the finance charge on a credit account based on the average of the account balance at the end of each day of the billing period.

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. 264 In your own words, what do you suppose a finance charge calculated on your average daily balance (with no new purchases included) means?

Example 1 A portion of Dewey Napp’s credit card statement is shown in Figure 7.4 below. A finance charge was added to Napp’s account balance because he did not pay his last bill in full. The finance charge was computed using the average-daily-balance method where new purchases were not included. Only the payment of $44.85 affected the average daily balance. What is the average daily balance?

Figure 7.4

Figure 7.4 (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 ÷ 30 = $170.93

Example 2 Dewey Napp (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) $194.85 – $44.85 = $150.00

Example 2 Answer: Step 2 Find the finance charge. Average Daily Balance × Periodic Rate $170.93 × 2% = $3.418 or $3.42

Example 2 Answer: Step 3 Find the new purchases. $48.75 + $37.85 + $20.99 = $107.59

Example 2 Answer: Step 4 Find the new balance. Unpaid Balance + Finance Charge + New Purchases $150.00 + $3.42 + $107.59 = $261.01

Practice 1 Gabriel Kaplan received his charge account statement for the billing period of 7/21 to 8/20. His previous balance was $1,562.35. From 7/21 to 7/28, he had an end-of-day balance of $1,562.35. His payment of $1,200 was posted on 7/29. From 7/30 until 8/20, his end-of-day balance was $362.35. What is the average daily balance?

Practice 1 Answer $672.03

END OF SECTION 7-3 Finance Charge: Average-Daily-Balance Method (No New Purchases Included)