Your credit card company quotes you a rate of 18.9%. Interest is billed monthly. What is the actual rate of interest you are paying?

Question

Quizplus · Accepted Answer

The actual rate of interest, also known as the effective annual rate (EAR), can be calculated when interest is compounded monthly by using the formula: $(1 + \frac{r}{n})^n - 1$, where $r$ is the annual nominal interest rate (0.189 in this case) and $n$ is the number of compounding periods per year (12 for monthly). Plugging in the values gives: $(1 + \frac{0.189}{12})^{12} - 1 = 0.2063$ or 20.63%.

Your Credit Card Company Quotes You a Rate of 18