10. Finance charges on credit cards Finance Charges on Credit Cards Even before you use a new credit card, what information is the institution that issued your card required by law to disclose? The rate of interest and estimated dollar amount of finance charges The method used to compute finance charges and estimated dollar amount of finance charges The rate of interest and method used to compute finance charges The interest rate on cash advances is generally the rate on purchases. The most common method that banks and retail credit card issuers use to compute finance charges is the average daily balance (ADB) method. You expect to actively use your card. Which variation of the ADB method will be least expensive for you? ADB excluding new purchases ADB including new purchases It doesnt matter Consider the following case: On November 1, Larrys credit card has a balance of $10,127.25. According to the terms of the cards lending agreement, an interest rate of 18% per year is assessed and the monthly finance charges are calculated using the Average Daily Balance (ADB) including purchases method. During the month, Larry expects to make the purchases listed below and will make a payment of $759.54 on November 25, and has collected the following additional information: Date Purchases November 5 $1,835.95 November 15 55.6 November 19 63.1 November 27 447.77 Additional Information Monthly interest rate 1.50% Beginning card balance $10,127.25 Days in the month 30 Use the following table to help Larry estimate his monthly interest charge for November. Dates Number of Days Daily Balance Calculated Value 11/2 - 11/5 4 $10,127.25 $ 11/6 - 11/15 10 11/16 - 11/19 4 11/20 - 11/25 6 11/26 - 11/27 2 11/28 - 11/1 4 $ Total 30 Average Daily Balance With Purchases $ Finance Charge $ One way by which Larry can increase his finance charges, everything else remaining constant, is to: Make larger or more frequent payments. Buy a larger number of more expensive items using your card. Make fewer, less expensive purchases.