Buy Now, Pay Later

Many people make purchases using credit cards.

Why might you want to buy something using a credit card instead of cash?

Lesson Objective

Compute the finance charge based on the average-daily-balance method–new purchases included.

Content Vocabulary

average-daily-balancemethod average-daily-balance method

Computing the finance charge on a credit account based on the average balance at the end of each day of the billing period.

average-daily-balance method

Computing the finance charge on a credit account based on the average balance at the end of each day of the billing period.

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.

Example 1Example 1

Figure 7.7Figure 7.7

Figure 7.7 (cont.)Figure 7.7 (cont.)

Find the sum of daily balances.

Example 1 Answer: Example 1 Answer: Step 1Step 1

Find the average daily balance.

Sum of Daily Balances ÷ Number of Days

$3,628.50 ÷ 31 = $117.048 or $117.05

Example 1 Answer: Example 1 Answer: Step 2Step 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 2Example 2

Find the unpaid balance.

Previous Balance – (Payments + Credits)

$125.80 – $70.00 = $55.80

Example 2 Answer: Example 2 Answer: Step 1Step 1

Find the finance charge.

Average Daily Balance × Periodic Rate

$117.05 × 2% = $2.3418 or $2.34

Example 2 Answer: Example 2 Answer: Step 2Step 2

Find the new purchases.

$25.85

Example 2 Answer: Example 2 Answer: Step 3Step 3

Find the new balance.

Unpaid Balance + Finance Charge + New Purchases

$55.80 + $2.34 + $25.85 = $83.99

Example 2 Answer: Example 2 Answer: Step 4Step 4

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 1Practice 1

What is the average daily balance?

What is the finance charge?

What is the new balance (new purchases included)?

Practice 1 (cont.)Practice 1 (cont.)

Average daily balance: $407.19

Finance charge: $5.09

New balance: $369.95

Practice 1 AnswerPractice 1 Answer