QuestionMay 30, 2025

Concept Check 2. Differentiate between a credit card and a charge account. 3. What is a finance charge? 4. Summarize how the finance charge is computed using the unpaid-balance method. 5. Summarize what "new purchases included" means in relation to finance charges. 6. Give the formula for determining the average daily balance. 7. CRITICAL THINKING Make two lists, one of advantages and one of disadvantages, of using a credit card to make purchases. 8. CRITICAL THINKING Name the advantages and disadvantages of offering customers charge accounts.

Concept Check 2. Differentiate between a credit card and a charge account. 3. What is a finance charge? 4. Summarize how the finance charge is computed using the unpaid-balance method. 5. Summarize what "new purchases included" means in relation to finance charges. 6. Give the formula for determining the average daily balance. 7. CRITICAL THINKING Make two lists, one of advantages and one of disadvantages, of using a credit card to make purchases. 8. CRITICAL THINKING Name the advantages and disadvantages of offering customers charge accounts.
Concept Check 2. Differentiate between a credit card and a charge account. 3. What is a finance charge? 4. Summarize how the finance charge is computed using the unpaid-balance method. 5. Summarize what "new purchases included" means in relation to finance charges. 6. Give the formula for determining the average daily balance. 7. CRITICAL THINKING Make two lists, one of advantages and one of disadvantages, of using a credit card to make purchases. 8. CRITICAL THINKING Name the advantages and disadvantages of offering customers charge accounts.

Solution
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Answer

1. Credit cards allow borrowing with interest; charge accounts require monthly full payment. ### 2. Finance charge is the cost of borrowing, including interest and fees. ### 3. Unpaid-balance method applies interest to the previous cycle's unpaid balance. ### 4. "New purchases included" adds new transactions to the balance before finance charge calculation. ### 5. Average Daily Balance = \frac{\text{Sum of daily balances}}{\text{Number of days in billing cycle}} ### 6. Credit card advantages: convenience, rewards, credit building; disadvantages: high interest, debt risk, fees. ### 7. Charge account advantages: loyalty, sales increase; disadvantages: non-payment risk, administrative costs. Explanation 1. Differentiate between a credit card and a charge account A credit card allows users to borrow funds up to a certain limit and pay back over time, often with interest. A charge account requires full payment of the balance each month. 2. Define finance charge A finance charge is the cost of borrowing money, including interest and fees. 3. Compute finance charge using unpaid-balance method The finance charge is calculated by applying the periodic interest rate to the unpaid balance from the previous billing cycle. 4. Explain "new purchases included" in relation to finance charges "New purchases included" means that new transactions are added to the balance before calculating the finance charge, potentially increasing the amount owed. 5. Formula for average daily balance **Average Daily Balance = \frac{\text{Sum of daily balances}}{\text{Number of days in billing cycle}}** 6. Advantages and disadvantages of using a credit card Advantages: - Convenience - Rewards programs - Building credit history Disadvantages: - High-interest rates - Potential for debt accumulation - Fees and penalties 7. Advantages and disadvantages of offering customers charge accounts Advantages: - Encourages customer loyalty - Increases sales Disadvantages: - Risk of non-payment - Administrative costs

Explanation

1. Differentiate between a credit card and a charge account<br /> A credit card allows users to borrow funds up to a certain limit and pay back over time, often with interest. A charge account requires full payment of the balance each month.<br /><br />2. Define finance charge<br /> A finance charge is the cost of borrowing money, including interest and fees.<br /><br />3. Compute finance charge using unpaid-balance method<br /> The finance charge is calculated by applying the periodic interest rate to the unpaid balance from the previous billing cycle.<br /><br />4. Explain "new purchases included" in relation to finance charges<br /> "New purchases included" means that new transactions are added to the balance before calculating the finance charge, potentially increasing the amount owed.<br /><br />5. Formula for average daily balance<br /> **Average Daily Balance = \frac{\text{Sum of daily balances}}{\text{Number of days in billing cycle}}**<br /><br />6. Advantages and disadvantages of using a credit card<br /> Advantages:<br />- Convenience<br />- Rewards programs<br />- Building credit history<br /><br /> Disadvantages:<br />- High-interest rates<br />- Potential for debt accumulation<br />- Fees and penalties<br /><br />7. Advantages and disadvantages of offering customers charge accounts<br /> Advantages:<br />- Encourages customer loyalty<br />- Increases sales<br /><br /> Disadvantages:<br />- Risk of non-payment<br />- Administrative costs
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