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Chapter 4, Section 2

Chapter 4, Section 2. Credit Card Finance Charges. How are finance charges calculated?. They are calculated based on your APR and using a monthly or daily periodic rate .

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Chapter 4, Section 2

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  1. Chapter 4, Section 2 Credit Card Finance Charges

  2. How are finance charges calculated? • They are calculated based on your APR and using a monthly or daily periodic rate. • To find the periodic rate, divide the APR by 12 or by 365 and round to the nearest ten-thousandth (4th spot after the decimal).

  3. Formula for Finance Charge • Balance subject to finance charge x periodic rate x number of periods • Example 1 • Check Your Understanding A & B

  4. How do credit cards figure the balance subject to finance charges? • The balance can be found by several methods—previous balance method, OR adjusted balance method.

  5. So how does the “previous balance method” work? • It charges interest on the balance in the account on the last billing date of the previous month. • Any payments, credits, or new purchases in the current month are NOT INCLUDED in the previous balance. • New balance= (finance charge + new purchases + fees) – (payments/credits) • Example 2 • Check your understanding C & D

  6. How does the “adjusted balance method”? • This method subtracts payments and credits during this month from the balance at the end of the previous month. • Purchases and fees made during the current month are not included in the adjusted balance. • Adjusted balance = previous balance – (payments + credits) • New Balance = adjusted balance + finance charge + new purchases + fees • Example 3 • Check your understanding E & F

  7. Let’s Practice! • P. 141-142, 5-16

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