The Influence of Calculation Methods on Interest Payments

A

The correct answer is A. Partly.

When a borrower obtains credit from a lender, such as a credit card or a loan, the lender typically charges an interest rate on the outstanding balance of the credit. The amount of interest the borrower pays is influenced by the lender's method of calculating the finance charge. The finance charge is the cost of borrowing the money and is typically calculated as a percentage of the outstanding balance.

There are different methods that a lender can use to calculate the finance charge, including the average daily balance method, the adjusted balance method, and the previous balance method. Each of these methods may result in a different amount of finance charge being applied to the borrower's account.

For example, the average daily balance method calculates the finance charge based on the average balance owed by the borrower during the billing cycle. In contrast, the adjusted balance method subtracts payments made by the borrower during the billing cycle from the balance owed at the end of the previous billing cycle.

Therefore, the amount of interest one pays on open credit depends partly on the method the lender uses to calculate the balances on which they apply finance charges. Other factors that may influence the amount of interest paid include the interest rate, the outstanding balance, and any fees charged by the lender.