Chapter 7 Charge Accounts and Credit Cards

Chapter 7 Charge Accounts and Credit Cards
Business Mathematics Chapter 7 Charge Accounts and Credit Cards How do you calculate finance charges?

Section 7-1 Account Statements
How do you calculate the balance on a charge account?

Credit Card or Charge Account
When you use this, you receive a monthly statement detailing all of the items you bought during a one-month period.

This allows the cardholder to purchase goods and services on demand.
Credit Card This allows the cardholder to purchase goods and services on demand. What are the advantages of using credit cards? What are the disadvantages of using credit cards?

Charge Account This is an existing line of credit, which is often used at a particular business.

Finance Charge If your previous bill was not paid in full, then the credit card or charge account company adds on a finance charge. This is interest that is charged for delaying payment on your account.

New Balance Formula

Example Alisha’s credit card statement showed a previous balance of $217.58, a finance charge of $2.26, new purchases totaling $141.37, and a payment of $ What is her new balance?

1. Find the new balance. Add the finance charge.
Example Alisha’s credit card statement showed a previous balance of $217.58, a finance charge of $2.26, new purchases totaling $141.37, and a payment of $ What is her new balance? 1. Find the new balance. Add the finance charge. New Balance = $ $2.26 = $

2. Find the new balance. Add the new purchases.
Example Alisha’s credit card statement showed a previous balance of $217.58, a finance charge of $2.26, new purchases totaling $141.37, and a payment of $ What is her new balance? 2. Find the new balance. Add the new purchases. New Balance = $ $141.37 = $

3. Find the new balance. Subtract the payment.
Example Alisha’s credit card statement showed a previous balance of $217.58, a finance charge of $2.26, new purchases totaling $141.37, and a payment of $ What is her new balance? 3. Find the new balance. Subtract the payment. New Balance = $ $50.00 = $

How do you calculate the balance on a charge account?
Complete the worksheet on Section 7-1 How do you calculate the balance on a charge account?

Complete the worksheet on Section 7-1
How do you calculate the balance on a charge account? On the back of your paper, write 3 advantages of using credit and 3 disadvantages of using credit.

Section 7-2 Finance Charge: Unpaid-Balance Method
How do you calculate the finance charge?

Unpaid-Balance Method
Some companies use the unpaid-balance method to compute finance charges.

Unpaid-Balance Method
This is when the finance charge is computed based on the portion of the previous balance you have not paid.

Finance Charge Formulas

Example Alisha’s credit card company uses the unpaid-balance method to compute finance charges. Her statement shows a previous balance of $217.58, new purchases totaling $141.37, and a payment of $ If the periodic rate is 1.25%, what is her new balance?

1. Find the unpaid balance.
Example Alisha’s credit card company uses the unpaid-balance method to compute finance charges. Her statement shows a previous balance of $217.58, new purchases totaling $141.37, and a payment of $ If the periodic rate is 1.25%, what is her new balance? 1. Find the unpaid balance. Unpaid Balance = $ $50.00 = $

2. Find the finance charge.
Example Alisha’s credit card company uses the unpaid-balance method to compute finance charges. Her statement shows a previous balance of $217.58, new purchases totaling $141.37, and a payment of $ If the periodic rate is 1.25%, what is her new balance? 2. Find the finance charge. Finance Charge = $ x 1.25% = $ 2.09

Example Alisha’s credit card company uses the unpaid-balance method to compute finance charges. Her statement shows a previous balance of $217.58, new purchases totaling $141.37, and a payment of $ If the periodic rate is 1.25%, what is her new balance? 3. Find the new balance. New Balance = $ $ $ $50.00 = $

Complete the worksheet on Section 7-2 How do you calculate the
finance charge?

Complete the worksheet on Section 7-2
How do you calculate the finance charge? Search the internet for the amount of credit debt for the average American. Then on the bottom of the worksheet, write 4 complete sentences about your findings, including but not limited to, the amount of credit debt.

How do you calculate the
Section 7-3 Finance Charge: Average Daily-Balance Method (No New Purchases Included) How do you calculate the finance charge?

Average-Daily-Balance Method
Some companies calculate the finance charge using the average-daily-balance method where no new purchases are included.

The average daily balance is the average of the account balance at the end of each day of the billing period.

For this method of computing finance charges, new purchases posted during the billing period are not included when figuring the balance at the end of the day.

If you need to recalculate the finance charge, multiply the average daily balance by the periodic rate. Remember …

Find the average daily balance, finance charge, and new balance.
Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% Payments& Credits New Balance Minimum Payment Payment Due $130.56 $20.00 07/23

Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% ? Payments& Credits New Balance Minimum Payment Payment Due $130.56 $20.00 07/23

Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% Payments& Credits New Balance Minimum Payment Payment Due $130.56 $20.00 07/23 1. Find the sum of the daily balances.

A payment was made on 06/21, therefore, the balance changed!
Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37

Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 Number of days from 06/03 to 06/20 = 20 – 2 = 18 .

Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 $2,238.66 $ x 18 = $ 2,238.66

Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 $2,238.66 6/21 $75.00

Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 $2,238.66 6/21 $75.00 $ 49.37 $ $75.00 = $ 49.37

Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 $2,238.66 6/21 $75.00 $ 49.37 1

Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 $2,238.66 6/21 $75.00 $ 49.37 1 6/22 – 7/02 Number of days from 6/22 to 7/02 = Note: June has 30 days!

Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 $2,238.66 6/21 $75.00 $ 49.37 1 6/22 – 7/02 11 Number of days from 6/22 to 7/02 = 32 – 21 = 11 . Note: June has 30 days!

Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 $2,238.66 6/21 $75.00 $ 49.37 1 6/22 – 7/02 11 $ $ x 11 = $

Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 $2,238.66 6/21 $75.00 $ 49.37 1 6/22 – 7/02 11 $ TOTAL 30 = 30 days

Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 $2,238.66 6/21 $75.00 $ 49.37 1 6/22 – 7/02 11 $ TOTAL 30 $ 2,831.10 $2, $ $ = $ 2,831.10

2. Find the average daily balance.
Dates Payment End-of-Day Balance X Number of Days Sum of Balances 6/03 – 6/20 $124.37 18 $2,238.66 6/21 $75.00 $ 49.37 1 6/22 – 7/02 11 $ TOTAL 30 $ 2,831.10 Average Daily Balance = $2, ÷ 30 = $ 94.37

Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% $ 94.37 Payments& Credits New Balance Minimum Payment Payment Due $130.56 $20.00 07/23 Finance Charge = $ x 1.5% = $ 1.42

New Balance = $124.37 + $1.42 + $130.56 - $75.00 = $ 181.35
4. Find the new balance. Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% $ 94.37 $1.42 Payments& Credits New Balance Minimum Payment Payment Due $130.56 $20.00 07/23 New Balance = $ $ $ $75.00 = $

New Balance = $124.37 + $1.42 + $130.56 - $75.00 = $ 181.35
4. Find the new balance. Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% $ 94.37 $1.42 Payments& Credits New Balance Minimum Payment Payment Due $130.56 $ $20.00 07/23 New Balance = $ $ $ $75.00 = $

finance charge?

How do you calculate the
Section 7-4 Finance Charge: Average Daily-Balance Method (New Purchases Included) How do you calculate the finance charge?

Some companies calculate the finance charge using the average-daily-balance method where new purchases are included when figuring the daily balances during the billing period.

Average-Daily-Balance Method new purchases included
REMEMBER that …

Average-Daily-Balance Method new purchases included
The finance charge and the new balance need to be calculated.

The finance charge is calculated by multiplying the average daily balance times the periodic rate.
Remember …

The new balance is comprised of an unpaid balance, a finance charge, and any new purchases.
Remember …

Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% Payments& Credits New Balance Minimum Payment Payment Due $130.56 $20.00 07/23

Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% ? Payments& Credits New Balance Minimum Payment Payment Due $130.56 $20.00 07/23

A purchase was posted on 6/08, therefore, the balance changed!
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 6/08- ? $51.64

Also a payment on the 21st and another purchase posted on 7/01!
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 6/08-6/20 $51.64 6/21-6/30 $ 75.00 7/01-7/02 $78.92

Now calculate the end of the day balances.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 6/08-6/20 $51.64 $ 6/21-6/30 $ 75.00 7/01-7/02 $78.92 $ $51.64 = $

… calculate the end of the day balances.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 6/08-6/20 $51.64 $ 6/21-6/30 $ 75.00 $ 7/01-7/02 $78.92 $ $51.64 = $ $ $75.00 = $

… calculate the end of the day balances.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 6/08-6/20 $51.64 $ 6/21-6/30 $ 75.00 $ 7/01-7/02 $78.92 $ $ $51.64 = $ $ $75.00 = $ $ $78.92 = $

Now calculate the number of days.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 5 6/08-6/20 $51.64 $ 6/21-6/30 $ 75.00 $ 7/01-7/02 $78.92 $ Number of days from 6/03 to 6/07 = 7 – 2 = 5 .

… calculate the number of days.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 5 6/08-6/20 $51.64 $ 13 6/21-6/30 $ 75.00 $ 7/01-7/02 $78.92 $ Number of days from 6/08 to 6/20 = 20 – 7 = 13 .

Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 5 6/08-6/20 $51.64 $ 13 6/21-6/30 $ 75.00 $ 10 7/01-7/02 $78.92 $ Number of days from 6/21 to 6/30 = 30 – 20 = 10 .

Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 5 6/08-6/20 $51.64 $ 13 6/21-6/30 $ 75.00 $ 10 7/01-7/02 $78.92 $ 2 Number of days from 7/01 to 7/02 = 2 – 0 = 2 .

Now multiply the end of day balance by the number of days.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 6/08-6/20 $51.64 $ 13 6/21-6/30 $ 75.00 $ 10 7/01-7/02 $78.92 $ 2 $ x 5 =

Now multiply the end of day balance by the number of days.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 6/21-6/30 $ 75.00 $ 10 7/01-7/02 $78.92 $ 2 $ x 5 = $

… multiply the end of day balance by the number of days.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 6/21-6/30 $ 75.00 $ 10 7/01-7/02 $78.92 $ 2 $ x 13 =

Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 $ 2,288.13 6/21-6/30 $ 75.00 $ 10 7/01-7/02 $78.92 $ 2 $ x 13 = $ 2,288.13

Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 $ 2,288.13 6/21-6/30 $ 75.00 $ 10 7/01-7/02 $78.92 $ 2 $ x 10 =

Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 $ 2,288.13 6/21-6/30 $ 75.00 $ 10 $ 1,010.10 7/01-7/02 $78.92 $ 2 $ x 10 = $ 1,010.10

Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 $ 2,288.13 6/21-6/30 $ 75.00 $ 10 $ 1,010.10 7/01-7/02 $78.92 $ 2 $ x 2 =

Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 $ 2,288.13 6/21-6/30 $ 75.00 $ 10 $ 1,010.10 7/01-7/02 $78.92 $ 2 $ $ x 2 = $

Now sum the number of days.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 $ 2,288.13 6/21-6/30 $ 75.00 $ 10 $ 1,010.10 7/01-7/02 $78.92 $ 2 $ TOTAL =

Now sum the number of days.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 $ 2,288.13 6/21-6/30 $ 75.00 $ 10 $ 1,010.10 7/01-7/02 $78.92 $ 2 $ TOTAL 30 = 30

Now sum the daily balances.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 $ 2,288.13 6/21-6/30 $ 75.00 $ 10 $ 1,010.10 7/01-7/02 $78.92 $ 2 $ TOTAL 30 $ $2, $1,010 + $ =

Now sum the daily balances.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 $ 2,288.13 6/21-6/30 $ 75.00 $ 10 $ 1,010.10 7/01-7/02 $78.92 $ 2 $ TOTAL 30 $ 4,279.94 $ $2, $1,010 + $ = $ 4,279.94

2. Find the average daily balance.
Dates Payment Purchases End-of-Day Balance X Number of Days Sum of Balances 6/03–6/07 $124.37 x 5 $ 6/08-6/20 $51.64 $ 13 $ 2,288.13 6/21-6/30 $ 75.00 $ 10 $ 1,010.10 7/01-7/02 $78.92 $ 2 $ TOTAL 30 $ 4,279.94 Average Daily Balance = $4, ÷ 30 = $

Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% $ Payments& Credits New Balance Minimum Payment Payment Due $130.56 $20.00 07/23 Finance Charge = $ x 1.5% =

Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% $ $ 2.14 Payments& Credits New Balance Minimum Payment Payment Due $130.56 $20.00 07/23 Finance Charge = $ x 1.5% = $ 2.14

4. Find the new balance. Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% $ $ 2.14 Payments& Credits New Balance Minimum Payment Payment Due $130.56 $20.00 07/23 New Balance = $ $ $ $75.00 =

New Balance = $124.37 + $ 2.14 + $130.56 - $75.00 = $ 182.07
4. Find the new balance. Reference Posting Date Transaction Date Description Purchases & Advances Payments & Credits 15427 187654 216745 06/08 06/21 07/01 06/05 06/31 Joe’s diner PAYMENT Save More $51.64 $78.92 $75.00 Billing Period Previous Balance Periodic Rate Average Daily Balance Finance Charge 06/03 - - 07/02 $124.37 1.5% $ $ 2.14 Payments& Credits New Balance Minimum Payment Payment Due $130.56 $ $20.00 07/23 New Balance = $ $ $ $75.00 = $

finance charge?

Complete the worksheet on Sections 7-3 & 7-4 How do you calculate the
finance charge?

Chapter 7 Test Charge Accounts & Credit Cards
Multiple choice May use your folder May use a calculator Must work alone

Buying Appliances on Credit
What are appliances? Major appliances are expensive. Some stores let customers buy appliances on credit. This way, people can pay for their purchases over many months. And some times it is interest free!!!

Major Kitchen Appliances
Microwave Dishwasher Electric Range Gas Range Refrigerator Freezer Waste Compactor

Complete the worksheet on buying applicances on credit.
How do you calculate monthly payments?

Also include the brand name.
How do you calculate monthly payments? Search the internet for the highest and lowest price for kitchen appliances. Also include the brand name. Microwave Dishwasher Electric Range Gas Range Refrigerator Freezer Waste Compactor

1. Microwave Highest Price $____________
Brand Name: ___________________ Lowest Price $____________

Chapter 7 Charge Accounts and Credit Cards

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