Question

You charged 1,000 on your credit card for Christmas presents. Your credit card company charges you 26% annual interest, compounded monthly. If you make the minimum payments of $25 per month, how long will it take (to the nearest month) to pay off your balance

Answer 1

94 months

Explanation:

You can use the amortization formula for this.

A = P(r/12)/(1 -(1 +r/12)^(-n))

A is the monthly payment; P is the principal amount; r is the annual interest rate, and n is the number of months.

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Filling in the numbers, we can solve for n:

25 = 1000(0.26/12)/(1 -(1+0.26/12)^-n)

Multiplying by the denominator and dividing by 25, we have ...

1 -(1+0.26/12)^-n = 1000(0.26)/(12(25)) = 13/15

Subtracting 13/15 and adding (1+0.26/12)^-n gives ...

2/15 = (1+0.26/12)^-n

Taking logs turns this into a linear equation:

log(2/15) = -n·log(1+0.26/12)

n = log(15/2)/log(1+0.26/12) = 93.999

It would take 94 months, or 7 years 10 months, to pay off the balance.

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Your total of payments would be $2,350.