Final answer:
The Equivalent Annual Rate (EAR) of a credit card that charges 1.38 percent interest per month is approximately 17.556%. EAR is calculated using the formula (1 + monthly rate)^12 - 1.
Step-by-step explanation:
The question is asking to determine the Equivalent Annual Rate (EAR) of a credit card that charges 1.38 percent interest per month. We will calculate the EAR using the formula for converting a monthly rate to an annual rate:
EAR = (1 + monthly rate)
12
- 1
First, convert the percentage to a decimal:
1.38% = 0.0138
Then apply the formula:
EAR = (1 + 0.0138)12 - 1
Calculating the power and subtracting 1 gives us:
EAR = (1.0138)12 - 1 ≈ 0.17556 or 17.556%
Therefore, the EAR on the credit card is approximately 17.556%. This shows that although the monthly rate seems small, the effective annual rate is similar to typical credit card interest rates which range from 12% to 18% per year.