Question

According to Debt.org the average household has $7,281 in credit card debt. Estimate how much interest the average household accumulates over the course of 1 year. We are going to assume the APR is 16.99%.

Answer 1

In order to estimate the interest the average househould accumulates in 1 year, you use the following formula:

A = Prt

where P is the initial credit card debt ($7,281), r is the interest rate per period (16.99%) and t is the number of time periods. In this case the value of r is given by the APR, then, there is one period of 1 year.

To use the formula it is necessary to express 16.99% as 0.1699. Thus, you have:

I = 7,281 x 0.1699 x 1

I = 1,237.04

Hence, the interest accumulated is of $1,234.04