Question

Marilyn uses a credit card with a 19.9% APR compounded monthly to pay for car repairs totaling $991.38. She can pay $410 per month on the card. What will the total cost of this purchase be?

$1,021.01

$1,188.66

$991.38

$1,192.39

Answer 1

Marilyn's finance charge at the end of the first month will be
$991.38 × 0.199/12 = $16.44
The balance subject to the next month's finance charge will be
$991.38 +16.44 -410.00 = $597.82

The finance charge at the end of the second month will be
$597.82 × 0.199/12 = $9.91
The balance remaining after the second payment will be
$597.82 +9.91 -410.00 = $197.73

The finance charge applied at the end of the third month is
$197.73 × .199/12 = $3.28
so Marilyn can make one final payment of
$197.73 +3.28 = $201.01
to pay off the balance.

In all, Marilyn has paid 2×$410.00 +201.01 =
$1021.01 . . . . . . . . corresponds to the first choice

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In real life, Marilyn's credit card may not accrue any finance charge until after the first statement on which the charge appears. Thus the total cost of the purchase may be only $1004.02. The attached spreadsheet shows the beginning balance and the finance charges for each month for the two different scenarios.