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Finance Charge: Unpaid Balance Method

Learn how to calculate finance charges using the unpaid balance method and manage credit accounts effectively. Practice examples included for better understanding.

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Finance Charge: Unpaid Balance Method

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  1. SECTION 7-2 pp. 261-263 Finance Charge: Unpaid Balance Method

  2. Find: • finance charge by using the unpaid-balance method Section Objective

  3. Key Words to Know unpaid-balance method (p. 261) Computing the finance charge on a credit account based on the portion of the previous balance that has not been paid.

  4. Formula Unpaid Balance = Previous Balance – (Payments + Credits) Finance Charge = Unpaid Balance ×Periodic Rate New Balance = Unpaid Balance + Finance Charge + New Purchases

  5. A Financial Gem? p. 261 What is Yuma’s new balance if the finance charge for an unpaid balance is 1.9 percent annual interest rate?

  6. Example 1 A portion of Lucille Sherman’s charge account statement is shown in Figure 7.3 below. The monthly finance charge is 1.5 percent of the unpaid balance. What is the new account balance?

  7. Figure 7.3

  8. Example 1 Answer: Step 1 Find the unpaid balance. Previous Balance – (Payments + Credits) $132.40 – $40.00 = $92.40

  9. Example 1 Answer: Step 2 Find the finance charge. Unpaid Balance × Periodic Rate $92.40 × 1.5% = $1.386 or $1.39

  10. Example 1 Answer: Step 3 Find the new balance. Unpaid Balance + Finance Charge + New Purchases $92.40 + $1.39 + $79.55 = $173.34

  11. Example 2 Alejandro Martinez has a charge account which uses the unpaid-balance method of computing finance charges. The periodic rate is 1.85 percent. If his previous balance is $478.68 and he had payments and credits of $250.00, find his unpaid balance and finance charge. If he has new purchases of $38.50, find his new balance.

  12. Example 2 Answer Step: Find the new balance. Unpaid balance = $478.68 – $250.00 = $228.68 Finance charge = $228.68 × 1.85% = $4.23058 or $4.23 New balance = $228.68 + $4.23 + $38.50 = $271.41

  13. Practice 1 Previous balance of $390. Payments and credits total $225. Periodic interest rate is 1.5 percent. What is the unpaid balance? What is the finance charge? New purchases of $60.98. What is the new balance?

  14. Practice 1 Answer Unpaid balance: $165.00 Finance charge: $2.48 New balance: $228.46

  15. END OF SECTION 7-2 Finance Charge: Unpaid Balance Method

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