Fred has a credit card which uses the previous balance method and charges 21 percent annual interest compounded daily, and has a 30 day billing period. He put a $7900 expense on his card and could not pay it off until eight days after the due date when he received his paycheck. How much does he owe in total at that time?
A)$8038.25
B)$7936.36
C)$8036.36
D)Insufficient information

Question

Quizplus · Accepted Answer

Using the previous balance method, Fred's balance at the end of the billing cycle is simply his $7900 expense.

Using the formula for compound interest, we can find the interest accrued on this balance for 38 days (30 day billing period + 8 days late):

A = P(1 + r/n)^(nt)
A = 7900(1 + 0.21/365)^(365/365 * 38)
A = $136.36

Therefore, Fred's total owed at the end of the 38 days is:

$7900 + $136.36 = $8036.36

So, the correct answer is C.

Fred Has a Credit Card Which Uses the Previous Balance