5 Questions
What is the credit limit of a credit card?
The maximum amount of money that the customer can charge on the account
How is interest usually charged on credit cards?
Varies with the brand and type of card
On what basis is interest computed for the second type of credit card?
Average daily balance
What does the example explain about the interest on the unpaid balance method?
How to calculate interest on unpaid balance
What was the new balance on Mike's credit card on June 1?
$758.94
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.
Test your knowledge of credit cards with this quiz covering credit limits, interest rates, and types of credit card interest calculations. Explore the differences between the two types of credit cards and their associated interest charges.
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