Problem:
Nancy Tai has recently opened a revolving charge account with MasterCard. Her credit limit is $1000, but she has not charged that much since opening the account. Nancy hasn't had the time to review her monthly statements promptly as she should, but over the upcoming weekend she plans to catch up on her work.
In reviewing October's statement she notices that her beginning balance was $600 and that she made a $200 payment on November 10. She also charged purchases of $80 on November 5, $100 on November 15, and $50 on November 30. She can't tell how much interest she paid in November because she spilled watercolor paint on that portion of the statement. She does remember, though, seeing the letters APR and the number 16%. Also, the back of her statement indicates that interest was charged using the average daily balance method, including current purchases, which considers the day of a charge or credit.
1. Assuming a 30-day period in November, calculate November's interest. Also calculate the interest Nancy would have paid with: a) the previous balance method, b) the adjusted balance method.
2. Going back in time when Nancy was just about to open her account, and assuming she could choose among credit sources that offered different monthly balance determinations, and assuming further that Nancy would increase her outstanding balance over time, which credit source would you recommend? Explain.
3. In talking with Nancy, you have learned that she can also get credit through her credit union. An advertisement from the union shows that Nancy could take a personal cash loan at 14% on a discount basis or an installment loan at 12% add-on. Each is a one-year loan. Would you advise Nancy to use one of these to pay off her November balance with MasterCard? (Assume the 14 and 12%s are not APRs.) Nancy doesn't believe she will have enough funds to reduce the November balance until the end of next October.