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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?

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

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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 1

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Figure 7.7

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Figure 7.7 (cont.)

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Find the sum of daily balances. Example 1 Answer: Step 1

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Find the average daily balance. Sum of Daily Balances ÷ Number of Days $3,628.50 ÷ 31 = $117.048 or $117.05 Example 1 Answer: Step 2

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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 2

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Find the unpaid balance. Previous Balance – (Payments + Credits) $125.80 – $70.00 = $55.80 Example 2 Answer: Step 1

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Find the finance charge. Average Daily Balance × Periodic Rate $117.05 × 2% = $2.3418 or $2.34 Example 2 Answer: Step 2

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Find the new purchases. $25.85 Example 2 Answer: Step 3

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Find the new balance. Unpaid Balance + Finance Charge + New Purchases $55.80 + $2.34 + $25.85 = $83.99 Example 2 Answer: Step 4

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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 1

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What is the average daily balance? What is the finance charge? What is the new balance (new purchases included)? Practice 1 (cont.)

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Average daily balance: $407.19 Finance charge: $5.09 New balance: $369.95 Practice 1 Answer

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