In this video we want to look at the average daily balance method and we’re going to use that to compute the finance charge on a credit card account that carries a balance from the previous month the starting balance and the transactions for the account are given to the right and we’re going to assume the annual interest rate is 18 so notice in the month of april

Which is 30 days we carry over the previous month’s balance of 170. so let’s go ahead and look at this table for day for the first few days april 1st and 2nd we have a balance of 170 that’s what we carried over so we’re going to take that 170 and multiply it by 2 to have this 340. we’re just going to leave this over here on the side then we have a transaction

On april 3rd for 95 charge so for april 3 4 and 5 which is a total of three days we had um a balance of 170 plus the charge 95 so we had 265 so we take 265 multiply it by 3 and we have a total of 795. just leave it here again then on april 6 we make a payment of 90 so that means we’re going to subtract 90. so we have that 265 we’re going to subtract 90. we have

A balance of 175 for eight days again this is april 6 7 8 9 10 11 12 and 13. so that’s eight days so we’re going to take that balance 175 multiply by eight and have fourteen hundred on april fourteenth we make a charge of 144 dollars so that’s an additional 144 so our balance of 175 plus 144 is 319. we have that balance for a total of 15 days that’s april 14th

Through the 28th so 14 15 16 17 18 19 20 21 22 23 24 25 26 27 and 28 15 days so we’re going to take that balance 319 multiply it by 15 and we’re gonna have four thousand seven hundred eighty-five and then finally we’re told on april 29th we have a charge of forty six dollars so for the 29th and thirtieth we’re going to add forty six dollars to the balance we

Carried of 319 so it has a balance of 365 for two days so that’s 730. we’re going to use these values in the last column to come up with our sum of outstanding balances which would be the 340 plus 795 plus 1400 plus 4785 and plus 730 and that is a that is 8050. now to find the average daily balance you take the sum of outstanding balances which is the 8050 and

You divide it by the days in the month for the month of april there’s 30 days and so we have an average daily balance of 268.33 now to find the finance charge which is our interest we’re going to use the formula interest equals principal times rate times time and we’re going to use the average daily balance as our principal so 268.33 our interest rate is given

At the top 18 percent so to find the decimal that you can just divide by 100 so it’s 0.18 and our time is 30 days out of a year which is 30 divided by 365. we’re not going to take into consideration leap year unless we’re told to do so when we do that we get a finance charge of 3.97 it’s actually 3.96 something but to round it to the nearest cent it was greater

Than five so the six rounded up to a seven so it’s three dollars and ninety seven cents

Transcribed from video

Average Daily Balance Method By Katrina Watson