Question

You have two options for credit cards. Option one offers a fixed annual percentage rate of 17%. Option two offers you an introductory annual percentage rate 10% for the first year increasing to 23% the second year. Each card offers you a $1,500 limit. In each of the first two years you reach your limit. Using simple interest, calculate the interest for both cards for the first two years. What is the difference in interest charges?

a) $15
b) $17
c) $23
d) $25

Answer 1

Answer: A) $15

Step-by-step explanation:

Option 1

Fixed annual percentage rate=17% on $1,500

17% of $1,500

=17/100×$1,500

=$255 per annum

For two years at 17% each

=$255×2

=$510

Option 2:

Annual percentage for first year=10%

10% of $1,500

=10/100×$1,500

=0.1×$1,500

=$150

Annual percentage for second year=23%

=23% of $1,500

=23/100×$1,500

=$345

For two years at 10% and 23% respectively

=$150+$345

=$495

Difference in charges between the two card options= two years interest for option 1 card + two years interest for option two card

=$510.00+$495.00

= $15

Answer 2

The difference in interest charges is:

a) $15

Step-by-step explanation:

Card 1:

Interest Year 1 $1.500 x 17%=$255

Interest Year 2 $1.500 x 17%=$255

Total Interest = $510

Card 2:

Interest Year 1 $1.500 x 10% = $150

Interest Year 2 $1.500 x23% = $345

Total Interest = $495

Difference

$510-$495=$15