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Chapter 8: Problem 26

A bank bills its credit card holders on the first of each month for each itemized billing. The card provides a 20-day period in which to pay the bill before charging interest. If the card holder wants to buy an expensive gift for a September 30 wedding but can't pay for it until November 5 , explain how this can be done without adding an interest charge.

Short Answer

Expert verified
To avoid adding an interest charge, the card holder should make the purchase on October 1. This purchase will fall into the November 1 billing cycle, and the payment due date will be November 21, within the 20-day grace period. Thus, if the card holder pays on November 5, no interest will be charged.

Step by step solution

01

Understanding the Billing Cycle

The card bills its users on the 1st of each month and provides a 20-day grace period to pay before any interests are charged. So, any expenses made will be billed the following month and should be paid off within 20 days after receiving the bill.
02

Analyzing the Purchase Date

The card holder wants to purchase a gift for a September 30 wedding but can only pay for it by November 5. The aim is to determine the most suitable date that falls within the billing cycle and the grace period to avoid any interest.
03

Determining the Purchase Date

If the holder makes the purchase on September 30, this purchase will be billed on October 1. From this date, a 20-day grace period is provided, which is until October 21. However, the card holder intends to pay on November 5, which falls beyond this grace period and hence, it will result in interest charges.
04

Finding an Alternative

An approach to avoid interest in this case is if the card holder makes the purchase on October 1. If the purchase is made on October 1, it will be billed on November 1 and the 20-day grace period will last until November 21. Since the card holder intends to pay on November 5, this falls within the grace period and therefore doesn't attract any interest.

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