Question

You have a credit card with 20% apr, and an outstanding balance of $300. You haven't made any new purchases in the last three months. This particular card uses the ADB method of calculating interest. What would your finance charge be with this month if there are no hidden fees?

Answer 1

Assuming you don't make any purchases or payments at all, your balance is going to sit at $300.

Then when it comes to calculating interest, the ADB (average daily balance) is $300 which means P = 300

The interest rate is 20%, telling us that r = 20/100 = 0.20

The time in years is t = 1/12

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Put this all into the simple interest formula: I = P*r*t to get

I = P*r*t

I = 300*0.20*1/12

I = 5

which means that the credit card company earned $5 this month, which is the finance charge (another way to say interest).

Answer 2

Okay, What does the P R and T stand for?

Answer 3

Sorry, just got it. Could you help with 2 more please?!

Answer 4

@jim_thompson5910

Answer 5

P = principal
r = rate
t = time

Answer 6

principal is the amount borrowed or loaned out

rate is the interest rate (in decimal form)

time is usually in years

Answer 7

What about:

You have a credit card with 8.9% APR that calculates interest using the ADB excluding new purchases method. The balance after your last billing cycle was $550. Whats your finance charge?

Answer 8

same idea, but now

P = 550
r = 0.089
t = 1/12

Answer 9

So just use the same formula with different numbers?

Answer 10

that is correct

Answer 11

Okay, and the last one is also a little different.

You have a credit card with 22.3% APR that calculates interest using the ADB including new purchases method. Last month, you bought a stereo for $1,000 on the second day of your billing cycle. Your billing cycle is thirty-one days. Before the purchase, your balance was $200. What will your finance charge be?

Answer 12

"Before the purchase, your balance was $200"

and

"you bought a stereo for $1,000 on the second day of your billing cycle"

Answer 13

Those two pieces of info mean that you had a balance of $200 for 1 whole day

The balance then jumps to 1000+200 = 1200 on day 2

The balance sits at $1200 for the remaining 30 days (since 1+30 = 31)

Answer 14

Now let's calculate the ADB (average daily balance)

(200*1 + 1200*30)/31 = 1,167.741935 = 1,167.74

So the ADB is $1,167.74

Answer 15

this is what the credit card company will use to calculate the interest (or finance) charge

Answer 16

making sense?

Answer 17

Somewhat, I just need to read over it a few times. But so far, so good for the most part!

Answer 18

this means

P = 1,167.74
r = 0.223
t = 1/12

Answer 19

For that second one, would I= 4.06285?

Answer 20

Okay, I see it now.

Answer 21

second one?

Answer 22

Yes, this one " You have a credit card with 8.9% APR that calculates interest using the ADB excluding new purchases method. The balance after your last billing cycle was $550. Whats your finance charge?"

And for that last one would the answer be I=21.613699? Also, are these numbers dollars or percentages or what?

Answer 23

550*0.089*1/12 = 4.079166 = $4.08

Answer 24

1167.74*0.223*1/12 = 21.70050 = $21.70

idk how you got your answers, so double check things

Answer 25

So I'm doing this incorrectly? Or am I supposed to round?

Answer 26

you're close, but a bit off

Answer 27

Okay, as long as I'm close!!

Answer 28

well it's always good to be as accurate as possible (at least to two decimal places)

Answer 29

you got 21.61 when you should get 21.70

Answer 30

so you're off by 9 cents, not a big deal, but it adds up

Answer 31

I had to convert 1/12 into a decimal which I think is 0.083? I don't have a calculator right now that does the fractions for me

Answer 32

oh i see, i'd stick to fractions as much as possible til you get to the final answer

Answer 33

if you must use decimals, use larger and more accurate versions

1/12 = 0.83333333

the '3's repeat forever

Answer 34

Yeah I just have trouble multiplying fractions is all. Oh, I guess I added an extra 0 by accident!

Answer 35

hmm i see

Answer 36

oh wait oops

Answer 37

i meant to say

1/12 = 0.083333333

Answer 38

the other decimal i posted was way too big

Answer 39

Oh! yeah haha that makes more sense! I got a huge number with that other one.

So, For one of these questions I had to see how much I wanted to save up a month and I chose $300.. Now it's asking "With a conservative interest rate of 3.25%, how much would you have in ten years?" Is there a formula for that?

Answer 40

so you're putting $300 in a savings account for 10 yrs?

Answer 41

Supposedly! Does that make any sense?

Answer 42

yeah, assuming simple interest, you'd earn

I = P*r*t

I = 300*0.0325*10

I = 97.50

So you'd earn $97.50 in interest alone

In total, you'd have 300+97.50 = $397.50 in the account (principal + interest)

Answer 43

I would only have that much after 10 years?

Answer 44

assuming a onetime deposit of $300, yes

Answer 45

What do you mean? I'd be saving $300 a month for 10 years. I just want to make sure I understand correctly

Answer 46

oh so you're putting $300 into the account each month for 10 yrs? and not one time only?

Answer 47

Yes, figuratively speaking :)

Answer 48

have you learned about annuities?

Answer 49

I don't believe I have!

Answer 50

hmm strange how they ask this question but not teach you annuities yet

Answer 51

This is the very last part of this class and I took a break from it for months. So if I did, I don't remember a thing

Answer 52

have a look at this

http://www.investopedia.com/terms/f/future-value-annuity.asp

tell me if it looks familiar

Answer 53

Will do!!:) Give me a second

Answer 54

That actually really doesn't look familiar, let me go to the chapter this assignment comes from to see if it's there..

Answer 55

yeah most likely it'll be in your book

Answer 56

I do these packets of work and to be honest they aren't the most helpful things in the world, if you couldn't already tell.

Answer 57

See, the lesson that question comes from goes over the history of credit, credit abuse recovery, debt elimination plans, etc.. no annuity

Answer 58

can you post a screenshot of the question?

Answer 59

Financial contracts, credit reports, loan basics.. Yeah I'll have to scan a picture of it so hold on

Answer 60

ok, you can either scan it or use a camera (phone) to get the digital pic of it

Answer 61

Yeah, scanning is just easier! It goes directly to my files

Answer 62

Should be just another minute..

Answer 63

alright

Answer 64

ok thanks

Answer 65

Yup:)

Answer 66

so yeah it's $300 per month for the next 10 years

Answer 67

ie 12*10 = 120 months

Answer 68

without interest, you'd put away 120*300 = $36,000 into your savings

Answer 69

however, interest complicates this problem

Answer 70

which is where annuities come in

Answer 71

And would you understand this by chance? It's the last assignment I need to do.

Answer 72

Yeah, like I said it's really not the best..

Answer 73

I'm not sure what to make of the second pic

Answer 74

That's okay, I'll just have to really ask a parent lol

Answer 75

but the general rule is that government backed investments or savings (like US treasury bonds or your FDIC bank account) are the safest investment options. However, the return is dismal

compare this to high risky things like stocks which provide a high return, but they could crash and you'd be left with nothing

Answer 76

basically: the higher the risk, the higher the reward/return

Answer 77

I'll keep that in mind. So I'd have to know annuity for the other one?

Answer 78

yes, on that page I sent you

Answer 79

Okay, I just don't know what the letters mean! What do they stand for?

Answer 80

C = cashflow (ie the amount you put in each month)

C = 300

Answer 81

Found it

Answer 82

i = interest rate per period

i = 0.0325/12 = 0.00270833333333 (approximate)

Answer 83

n = number of periods (aka number of payments)

n = 10*12 = 120

so you'll deposit 120 payments of $300 (think of a deposit as a payment to your savings account, that's how I think of it)

Answer 84

okay, and once i plug that in is that the answer?

Answer 85

yep, tell me what you get

Answer 86

Okay, I don't think I have a good enough calculator righ now, I'll get back to you tomorow with what I have! I have to go :( Thanks!!

Answer 87

ok cya later. You can always use an online calculator (which is free)

Answer 88

Yeah, I ended up doing that. By the way, the answer I got is $153,240.67

Answer 89

This is what I got


\[\Large FV = C * \left[ \frac{(1+i)^{n} - 1}{i} \right] \]


\[\Large FV = 300 * \left[ \frac{(1+0.00270833333333)^{120} - 1}{0.00270833333333} \right] \]


\[\Large FV = 42,471.4441213281 \]


\[\Large FV = 42,471.44 \]


So there will be $42,471.44 in the account in 10 years.