Marlene Has A Credit Card That Uses The Adjusted Balance Method. For The First 10 Days Of One Of Her 30-day Billing Cycles, Her Balance Was $$570$. She Then Made A Purchase For $$ 120 120 120 [/tex], So Her Balance Jumped To

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Understanding the Adjusted Balance Method: A Case Study with Marlene's Credit Card

What is the Adjusted Balance Method?

The adjusted balance method is a way of calculating interest charges on a credit card account. It takes into account the outstanding balance at the end of the billing cycle, rather than the balance at the beginning of the cycle. This method is used by many credit card issuers to determine the interest charges on a customer's account.

How Does the Adjusted Balance Method Work?

To understand how the adjusted balance method works, let's consider Marlene's credit card account. Marlene has a credit card that uses the adjusted balance method, and her billing cycle is 30 days long. For the first 10 days of the billing cycle, her balance was $570. Then, she made a purchase for $120, which increased her balance to $690.

Calculating the Interest Charges

To calculate the interest charges on Marlene's account, we need to determine the outstanding balance at the end of the billing cycle. Since Marlene made a purchase for $120 on the 11th day of the billing cycle, her balance will be $690 for the remaining 19 days of the cycle.

Interest Rate and Daily Periodic Rate

The interest rate on Marlene's credit card is 20% per annum, which is equivalent to a daily periodic rate of 0.0005472 (20%/365). This means that Marlene will be charged interest on her outstanding balance at a rate of 0.0005472 per day.

Calculating the Interest Charges for 19 Days

To calculate the interest charges for 19 days, we can use the formula:

Interest Charges = Outstanding Balance x Daily Periodic Rate x Number of Days

Plugging in the values, we get:

Interest Charges = $690 x 0.0005472 x 19 Interest Charges = $7.13

Total Amount Due

The total amount due on Marlene's credit card account is the sum of the outstanding balance and the interest charges:

Total Amount Due = Outstanding Balance + Interest Charges Total Amount Due = $690 + $7.13 Total Amount Due = $697.13

Conclusion

In this case study, we saw how the adjusted balance method is used to calculate interest charges on a credit card account. We calculated the interest charges on Marlene's account for 19 days, using the daily periodic rate and the outstanding balance. The total amount due on Marlene's credit card account is $697.13, which includes the outstanding balance and the interest charges.

Key Takeaways

  • The adjusted balance method is a way of calculating interest charges on a credit card account.
  • The method takes into account the outstanding balance at the end of the billing cycle.
  • The interest rate on a credit card account is typically expressed as an annual percentage rate (APR).
  • The daily periodic rate is calculated by dividing the APR by 365.
  • The interest charges on a credit card account can be calculated using the formula: Interest Charges = Outstanding Balance x Daily Periodic Rate x Number of Days.

Frequently Asked Questions

  • Q: What is the adjusted balance method? A: The adjusted balance method is a way of calculating interest charges on a credit card account.
  • Q: How does the adjusted balance method work? A: The method takes into account the outstanding balance at the end of the billing cycle.
  • Q: What is the daily periodic rate? A: The daily periodic rate is calculated by dividing the APR by 365.
  • Q: How are interest charges calculated? A: Interest charges are calculated using the formula: Interest Charges = Outstanding Balance x Daily Periodic Rate x Number of Days.

References

  • [1] Federal Reserve. (2022). Credit Card Interest Rates.
  • [2] Consumer Financial Protection Bureau. (2022). Credit Card Agreements.
  • [3] National Credit Union Administration. (2022). Credit Card Interest Rates.

Glossary

  • Adjusted Balance Method: A way of calculating interest charges on a credit card account.
  • APR: Annual percentage rate, expressed as a percentage.
  • Daily Periodic Rate: The rate at which interest is charged on a credit card account, calculated by dividing the APR by 365.
  • Interest Charges: The amount of interest charged on a credit card account.
  • Outstanding Balance: The balance on a credit card account at the end of the billing cycle.
    Frequently Asked Questions: Understanding the Adjusted Balance Method

Q: What is the adjusted balance method?

A: The adjusted balance method is a way of calculating interest charges on a credit card account. It takes into account the outstanding balance at the end of the billing cycle, rather than the balance at the beginning of the cycle.

Q: How does the adjusted balance method work?

A: The method works by calculating the interest charges on the outstanding balance at the end of the billing cycle. This is typically done by multiplying the outstanding balance by the daily periodic rate and the number of days in the billing cycle.

Q: What is the daily periodic rate?

A: The daily periodic rate is the rate at which interest is charged on a credit card account, calculated by dividing the APR by 365.

Q: How are interest charges calculated?

A: Interest charges are calculated using the formula: Interest Charges = Outstanding Balance x Daily Periodic Rate x Number of Days.

Q: What is the difference between the adjusted balance method and the average daily balance method?

A: The average daily balance method calculates interest charges based on the average balance on the account over the billing cycle, while the adjusted balance method calculates interest charges based on the outstanding balance at the end of the billing cycle.

Q: Can I avoid interest charges by paying my balance in full each month?

A: Yes, paying your balance in full each month can help you avoid interest charges. However, it's essential to review your credit card agreement to understand the terms and conditions of your account.

Q: How can I minimize interest charges on my credit card account?

A: To minimize interest charges, consider the following strategies:

  • Pay your balance in full each month
  • Make timely payments to avoid late fees and interest charges
  • Keep your credit utilization ratio low
  • Avoid making new purchases on your credit card account
  • Consider consolidating debt to a lower-interest credit card or loan

Q: What happens if I miss a payment on my credit card account?

A: Missing a payment on your credit card account can result in late fees, interest charges, and a negative impact on your credit score. It's essential to communicate with your credit card issuer and make arrangements to catch up on payments as soon as possible.

Q: Can I dispute interest charges on my credit card account?

A: Yes, you can dispute interest charges on your credit card account if you believe they are incorrect or unfair. Review your credit card agreement and contact your credit card issuer to discuss your concerns.

Q: How can I avoid interest charges on my credit card account during a promotional period?

A: To avoid interest charges during a promotional period, consider the following strategies:

  • Pay your balance in full each month
  • Make timely payments to avoid late fees and interest charges
  • Keep your credit utilization ratio low
  • Avoid making new purchases on your credit card account
  • Review your credit card agreement to understand the terms and conditions of your account

Q: What is the difference between a credit card with a 0% APR promotional period and a credit card with a regular APR?

A: A credit card with a 0% APR promotional period offers a temporary period of 0% interest charges, while a credit card with a regular APR charges interest at the standard rate. It's essential to review the terms and conditions of your credit card agreement to understand the differences between these types of credit cards.

Q: Can I transfer a balance from one credit card to another with a lower interest rate?

A: Yes, you can transfer a balance from one credit card to another with a lower interest rate. However, be aware of any balance transfer fees and the terms and conditions of the new credit card agreement.

Q: How can I avoid balance transfer fees on my credit card account?

A: To avoid balance transfer fees on your credit card account, consider the following strategies:

  • Review your credit card agreement to understand the balance transfer fees
  • Look for credit cards with no balance transfer fees
  • Consider consolidating debt to a lower-interest credit card or loan
  • Make timely payments to avoid late fees and interest charges

Q: What is the difference between a credit card with a balance transfer fee and a credit card with no balance transfer fee?

A: A credit card with a balance transfer fee charges a fee for transferring a balance from another credit card, while a credit card with no balance transfer fee does not charge a fee for balance transfers. It's essential to review the terms and conditions of your credit card agreement to understand the differences between these types of credit cards.