Unpaid Balance Method for Calculating Finance Charges

In this video, I go over how to calculate a fiinance charge on a credit card using the unpaid balance method.

Hi this is dr. dave and in this video i want to show you how to calculate your finance charges using a method called the unpaid balance method this is a method that was used well quite a few years ago to calculate finance charges on credit cards now it’s not used so much but it does give us some practice in using some of the formulas like the simple interest formula

That we’ve been using in the class so suppose that on january 1st you have a credit card balance of six hundred and twenty dollars on january 10th you purchase a magazine subscription for twenty dollars on january 12th you return an item to target for a credit of \$34.50 on january 22nd you make a payment of five hundred dollars on january 25th you make a purchase

At safeway of a hundred and twelve dollars now the annual credit interest rate on your credit card is twenty one percent and we want to calculate the finance charge for january that will appear on the next month statement using the unpaid balance method we need to calculate two different finances charges one for the outstanding balance of six hundred and twenty

Dollars for the previous month and then another for the unpaid balance at the end of january so let’s take a look at that previous month so to find our finance charge which is simply interest i’m going to use i equals p r t remember the interest in this case is our finance charge p is the present value r is the interest rate and we need to remember to put that in as

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A decimal and then t is time so our present value the amount that we have outstanding is six hundred and twenty dollars our interest rate is twenty one percent so zero point two one and since this is an annual interest rate i need to do my time in terms of years so i’m gonna write it as one over 12 so it’s 1/12 of a year so now let me turn on my calculator and put

That on so we’re gonna say 620 times 0.2 one times 1/12 so we get 10 dollars and 85 cents for the finance charge that’s going to be on the january bill so now in order to figure out the finance charge for january we need to add the finances charges that purchases subtract the returns and payments from the previous month’s unpaid balance so remember our previous

Month’s unpaid balance was six hundred and twenty dollars so we have to add on the finance charge that we just found we need to add our purchases remember we had a purchase of \$20 so we’re gonna have to add that in that increases our balance we also had a purchase of a hundred and twelve so that also increases our balance and then we add a return of thirty four

Fifty so that’s going to decrease our balance and then we also had a payment of five hundred dollars so that’s also going to decrease our balance so now let’s put that into our calculator and figure out what our balance is at the end of the month so six hundred and twenty add in the finance charge of \$10.85 we add the purchase of twenty so that adds the purchase