There are several methods to calculate interest amount on revolving charge accounts, credit cards and other credit facilities. The issue at hand deals with calculation of interest on a revolving charge account using several methods such as average daily balance method, previous balance method and adjusted balance method. The calculation of these methods and a comparative evaluation is presented in the following sections.
The most common methods of calculating interest on credit cards and similar credit facilities are average daily balance method, adjusted balance method and previous balance method (Credit.com, 2009). The interest amount in average daily balance method is calculated by taking the average of outstanding balance at the end of each day. The adjusted balance method on the other hand calculates interest based on the outstanding balance at the end of a billing cycle and interest in the previous balance method is calculated using the outstanding balance at the end of previous month.
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