Finance Charge Calculation Methods

The video tutorial explains two methods for calculating finance charges on credit cards: the previous balance method and the average daily balance method. It provides examples using Peter's and Allison's credit card transactions to illustrate each method. The tutorial covers the calculation of finance charges and the determination of new account balances, emphasizing the importance of understanding interest rates and billing periods.

What are the two methods discussed for calculating finance charges on credit cards?

• Simple interest method and compound interest method

• Previous balance method and average daily balance method

• Fixed rate method and variable rate method

• Monthly balance method and annual balance method

In the previous balance method, on what is the finance charge based?

• The highest balance during the month

• The average balance over the year

• The previous month's balance

• The current month's balance

What was Peter's balance due on November 5th?

• $275

• $358

• $145

• $320

How is the finance charge calculated using the previous balance method?

• By averaging the daily balances

• By adding all charges and subtracting payments

• By using the compound interest formula

• By multiplying the previous balance by the interest rate and time

What is the interest rate used in Peter's example for calculating the finance charge?

• 2% per month

• 1% per month

• 1.3% per month

• 1.5% per month

What is the new account balance for Peter on December 5th?

• $453.58

• $320.00

• $275.00

• $145.00

Why do many lending institutions prefer the average daily balance method?

• It is required by law

• It results in higher charges

• It is more fair to the customer

• It is easier to calculate

What was Allison's balance on July 1st?

• $375.80

• $150.00

• $74.35

• $42.50

How many days did Allison's balance remain unchanged between July 1st and July 5th?

• 3 days

• 4 days

• 6 days

• 5 days

What is the average daily balance for Allison's billing period?

• $359.18

• $375.80

• $466.15

• $423.65