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 rate of interest and method used to compute finance charges

The method used to compute finance charges and estimated dollar amount of finance charges

The interest rate on cash advances is generallyhigher than 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 August 1, Clancys credit card has a balance of $3,375.75. According to the terms of the cards lending agreement, an interest rate of 14% per year is assessed and the monthly finance charges are calculated using the Average Daily Balance (ADB) including purchases method.

During the month, Clancy expects to make the purchases listed below and will make a payment of $253.18 on August 23, and has collected the following additional information:

Date	Purchases
August 6	$245.31
August 13	1,940.83
August 21	130.41
August 26	212.85

Additional Information

Monthly interest rate	1.17%
Beginning card balance	$3,375.75
Days in the month	31

Use the following table to help Clancy estimate his monthly interest charge for August.

Dates	Number of Days	Daily Balance	Calculated Value
8/2 - 8/6	5	$3,375.75
8/7 - 8/13	7
8/14 - 8/21	8
8/22 - 8/23	2
8/24 - 8/26	3
8/27 - 8/1	6
Total	31
Average Daily Balance With Purchases
Finance Charge

One way by which Clancy can reduce his finance charges, everything else remaining constant, is to:

Request a lower interest rate on his credit card.

Make smaller payments.

Make more, even more expensive purchases.