Question

Please show your calculations. If calculations are not provided, points may be deducted. Question 1: Calculate the financial charges for the following credit card account daily balances: $900 - during 5 days $1,200 - during 10 days $500 - during 7 days $790 - during 8 days The financial charges are calculated based on the ADB including new purchases. The credit card APR is 18%. After calculating the financial charges, what would be the annual effective rate if there was a $20 late payment fee added to the same monthly cycle? The intent here is to calculate what is the monthly periodic interest rate and project the annual rate. Assume the month has 30 days and the year has 365 days.

Answer 1

Calculation of finance charges:

Finance charges = (Average daily balance X Annual percentage rate X No. of days in billing cycle) / 365

= (877 X 18% X 30)/ 365

= 12.98 $

Calculation of ADB - Average daily balance

Add together balances for each day of the month, then divide that number by number of days in billing cycle

Daily balance (A)	No. of days (B)	Total (AX B)
900	5	4,500
1,200	10	12,000
500	7	3,500
790	8	6,320
TOTAL		26,320
No. of days		30
ADB (Average daily balance)		877

Calculation of annual effective rate

= [{Fees + Interest)/ Principal} / N] X 365 X 100

= [{20 + 12.98)/ 877} / 30] X 365 X 100

= 46%