Assume that you have a balance of $5000 on your Visa credit card and that you make no more charges. If your APR is 22% and each month you make only the minimum payment of 3% of your balance, then find a formula for the balance after t monthly payments.

Question

Quizplus · Accepted Answer

The balance formula incorporates the effect of interest and the minimum payment. The APR of 22% annually translates to a monthly interest rate of 22%/12 = 1.8333%. Thus, after interest, the balance increases to 101.8333% of its previous value. Then, paying 3% of this new balance reduces it to 97.8333% (100% - 2.1667%) of its value after interest was added. This reduction factor per month is 0.978333, hence the formula is 5000(0.978333)^t.

Assume That You Have a Balance of $5000 on Your