Aaron had an unpaid balance of $2417.44 on his credit card statement at the beginning of...

Question:

Aaron had an unpaid balance of {eq}\$2417.44 {/eq} on his credit card statement at the beginning of December. He made a payment of {eq}\$160.00 {/eq} during the month, and made purchases of {eq}\$178.91 {/eq}. If the interest rate on Aaron's credit card was {eq}17\% {/eq} per month on the unpaid balance, find his finance charge and the new balance on January 1.

Finance Charge:

The finance charge for the outstanding amount for a firm or individual is the interest expense payable to the lender for the period during which the amount is borrowed. The interest rate quoted by the lenders is usually the nominal annual interest rate which needs to be converted as per the tenor of borrowing.

Answer and Explanation:

The calculated values for the finance charge and the new balance on January 1 are $410.96 and $2,847.31 respectively.

The finance charge for the month of December is given by:

  • = Unpaid balance at the beginning of December * interest rate on the credit card
  • = $2,417.44 * 17%
  • = $410.96

The new balance on January 1 is given by:

  • = Unpaid balance at the beginning of December + finance charge for the month + purchases made - payments made
  • = $2,417.44 + $410.96 + $178.91 - $160
  • = $2,847.31

Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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