ERIE COMMUNITY COLLEGE

TITLE III
Basic Skills
Interdisciplinary Course Materials
Business Adinistration
Course! MT001
Course Outline Topic! Percent and decimals
Title! The Average Daily Balance Method of Determining Interest Rate
"ro#ect $escription! The student will learn about the Average Daily Balance Method of determining
interest rate on a credit card bill The activity will also discuss the different terms that one might
find on a credit card statement An o!tional activity will be to re!eat the activity using the "n!aid
Balance Method# and the students will then be given an o!!ortunity to com!are the two methods
T%in&s to Learn Be'ore Startin& t%e "ro#ect! $ow to find the average of a sum of numbers# and how
to use !ercents to solve !roblems %including sim!le interest !roblems&
Aut%or! 'olleen (uinn %Mathematics&
Aut%ors! Maryangela )adi*ian %Business Administration&# +rica $endra %+nglish&
Seester Created! ,!ring -00.
Resources! answer sheet# words to use in an Internet search engine
Contents! I Pro/ect sheet with e0!lanation of 'redit 'ard terminology
II +0am!le of how to com!ute the Average Daily Balance Method
III Pro/ect (uestions
I1 Answer 2ey
1 Pro/ect +0tensions
Erie Community College
Title III Grant
3ame4 55555555555555555555555555555555555555555555555555555555555
Credit Cards and Installent Buyin&
'redit 'ards are a !o!ular way of ma*ing !urchases or borrowing money The use of a credit
card is an e0am!le of an o!en 6 installment loan 'redit 'ards ty!ically have Daily Periodic
Rates and Annual Percentage Rates7 these rates vary with different charge accounts and
localities
'redit 'ard monthly statements contain the following information4 balance at the beginning of
the billing cycle# balance at the end of the billing cycle# the transactions that have ta*en !lace
between these dates# !ayment due date# and minimum !ayment due date
Many ban*ing institutions use the Average Daily Balance Method. 8ith the Average Daily
Balance Method# a balance is determined each day of the billing !eriod for which there is a
transaction in the account It is illustrated in the e0am!le below4
+0am!le4 The balance on 9oe Mosca:s credit card account on 9uly 1# the billing date# was
;<=>?0 The following transactions occurred in the month of 9uly
9uly > Payment ;1>000
9uly 10 'harge4 The )a! ;=@<>
9uly 1? 'harge4 )arage ;1-<>0
9uly -? 'harge4 Root Aive ;1@->0
a& Aind the average daily balance for the billing !eriod
b& Aind the finance charge to be !aid on August 1 Assume the interest rate is 1<B !er month
c& Aind the balance due on August 1
,olution4
a& To determine the average daily balance# we do the following %i& Aind the balance due for
each transaction date An easy way to do this is to use a calendar %There are <1 days in
9uly& %ii& Then find the average balance for the month of 9uly %add each daily balance
and divide by <1&
Erie Community College
Title III Grant
9uly
(
;<=>?0
)
;<=>?0
*
;<=>?0
+
;<=>?0
,
;<=>?0 C
;1>000 D
;-->?0
-
;-->?0
.
;-->?0
/
;-->?0
0
;-->?0
(1
;-->?0 E
;=@<> D
<001>
((
;<001>
()
;<001>
(*
;<001>
(+
;<001>
(,
;<001>
(-
;<001>
(.
;<001>
(/
;<001> E
;1-<>0 D
;@-<F>
(0
;@-<F>
)1
;@-<F>
)(
;@-<F>
))
;@-<F>
)*
;@-<F>
)+
;@-<F>
),
;@-<F>
)-
;@-<F>
).
;@-<F>
)/
;@-<F> E
;1@->0 D
;>FF1>
)0
;>FF1>
*1
;>FF1>
*(
;>FF1>
Au&ust (
Ne2 cycle
3e&ins
Another way to find the Average Daily Balance without using a calendar is to %i& Aind the
number of days that the balance did not change between each transaction 'ount the first day in
the !eriod# but not the last day %ii& Multi!ly the balance due by the number of days the balance
did not change %iii& Aind the sum of the !roducts %iv& Divide sum by <1
Date Balance Due 3umber of Days Balance %Balance&%Days&
Did not 'hange
9uly 1 ;<=>?0 @ %;<=>?0&%@& D ;1>0<-0
9uly > ;-->?0 > %;-->?0&%>& D ;11-.00
9uly 10 ;<001> ? %;<001>&%?& D ;-@01-0
9uly 1? ;@-<F> 10 %;@-<F>&%10&D ;@-<F>0
9uly -? ;>FF1> @ %;>FF1>&%@& D ;--F@F0
,um D ;11#><@>0
Erie Community College
Title III Grant
Average Daily Balance D D ;<=-0?
b& The finance charge for the month is found using the sim!le interest formula %I D !rt&# using the
average daily balance as the !rinci!al
I D ;<=-0? 0 001< 0 1 D ;@?@
c& ,ince the finance charge for the month is ;@?@# the balance owed on August 1 is
;>FF1> E ;@?@ D ;>=0..
Practice Problems4
1& The balance on 'olleen:s 'redit 'ard on May 1-# their billing date# was ;<=?>0 Aor the
!eriod ending 9une 1-# they had the following transactions
May 1< 'harge4 Toys ;1-.=.
May 1> Payment ;>000
9une 1 'harge4 'lothing ;1<>?>
9une ? 'harge4 $ousewares ;<=F<
a& Aind the average daily balance for the billing !eriod
b& Aind the finance charge to be !aid on 9une 1- Assume an interest rate of 1<B !er
month
c& Aind the balance due on 9une 1-
-& Gn 9une 1# the billing date# 2risten 8irth had a balance due of ;@?>=> on her credit card The
transactions during the month of 9une were4
9une @ Payment ;<=>00
9une ? 'harge4 'ar Re!air ;<=000
9une -1 'harge4 Airline tic*et ;1=>?0
9une -? 'harge4 'lothing ;1?@=>
a& Aind the average daily balance for the !eriod
b& Aind the finance charge on 9uly 1 by using the average daily balance method Assume that
the interest rate is 1<B !er month
c& Aind the new account balance on 9uly 1 using the finance charge found in !art %d&
Erie Community College
Title III Grant
Answer 2ey4
Practice Problem H1
a& ;>1-00
b& ;FFF
c& ;F?<@<
Practice Problem H-
a& ;>0?..
b& ;FF-
c& ;?@=.-
Pro/ect +0tensions
1& ,tudents can re!eat the same !roblems using the Unpaid Balance Met%od4 The borrower is
charged interest or a finance charge on the un!aid balance from the !revious charge !eriod
"sing the class e0am!le# we would use balance of ;<=>?0 to calculate the finance charge using
the sim!le interest formula# which would give us ;@?. ,ince the finance charge for the month
is ;@?.# the balance owed on August 1 is ;>FF1> E ;@?. D ;>=10@
-& ,tudents could then com!are and contrast the "n!aid Balance Method with the Average
Daily Balance method# after the com!lete both e0ercises# and decide which method is
best They could write a summary of their findings and their o!inion based on these
findings
<& ,tudents could investigate their own credit cards and see which method is used to
determine their interest rate They could also search online for other credit card offers
that may give them a better interest rate# use their !referred way of determining an
interest rate# etcIand write a summary of what they found
Erie Community College
Title III Grant