Question

Tommy is trying to decide which credit card to open. He is looking to purchase a $600 iPhone and needs to put it on a credit card. Visa is offering him a nominal rate of 18% that is compounded monthly, and Mastercard is offering him an annual rate of 19%. If Tommy isn't going to make any payments or charge anything else on this card, which card will he owe less on after two years?

a) Visa
b) Mastercard

Answer 1

To determine which credit card Tommy will owe less on after two years, we need to calculate the total amount owed on each card using the provided interest rates. By plugging in the numbers and calculating the total amount owed for each card, we can determine which card Tommy will owe less on after two years.

Step-by-step explanation:

To determine which credit card Tommy will owe less on after two years, we need to calculate the total amount owed on each card.

For Visa, the nominal rate of 18% compounded monthly means the monthly interest rate is 18% divided by 12, or 1.5%. To calculate the total amount owed after two years, we would use the formula:

Total Amount Owed = Principal * (1 + Monthly Interest Rate)^Number of Months

For Mastercard, the annual rate of 19% means the monthly interest rate is 19% divided by 12, or 1.58%. To calculate the total amount owed after two years, we would use the same formula as above.

By plugging in the numbers and calculating the total amount owed for each card, we can determine which card Tommy will owe less on after two years.