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Questions and Answers
What is the credit limit of a credit card?
What is the credit limit of a credit card?
- The average daily balance
- The interest charged on the unpaid balance
- The maximum amount of money that the customer owes to the bank
- The maximum amount of money that the customer can charge on the account (correct)
How is interest usually charged on credit cards?
How is interest usually charged on credit cards?
- Varies with the brand and type of card (correct)
- Monthly at a fixed rate
- Every time a purchase is made
- Yearly at a fixed rate
On what basis is interest computed for the second type of credit card?
On what basis is interest computed for the second type of credit card?
- Yearly purchases
- Average daily balance (correct)
- Unpaid balance
- Monthly purchases
What does the example explain about the interest on the unpaid balance method?
What does the example explain about the interest on the unpaid balance method?
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What was the new balance on Mike's credit card on June 1?
What was the new balance on Mike's credit card on June 1?
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Study Notes
Credit Card Basics
- Credit limit refers to the maximum amount a credit card holder can charge on their card.
Interest Charges on Credit Cards
- Interest is usually charged on credit cards when the outstanding balance is not paid in full by the due date.
Interest Computation Methods
- There are two types of interest computation methods: previous balance method and unpaid balance method.
- The second type of credit card, which uses the unpaid balance method, computes interest based on the outstanding balance at the beginning of the billing cycle.
Unpaid Balance Method
- The unpaid balance method computes interest on the outstanding balance at the beginning of the billing cycle, including new purchases and any unpaid interest.
- The example illustrates that interest is charged on the entire unpaid balance, including new purchases, if the balance is not paid in full by the due date.
Mike's Credit Card Example
- On June 1, Mike's new balance on his credit card was the sum of the previous balance, new purchases, and interest charges.
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