Imagine you put the $300 in a savings account earning 3.0% APR instead of using it to pay down your credit card as in Problem 3. What is the difference between the interest your savings account would earn that month vs. the interest that would accrue on your credit card that month if you didn't use the $300 to pay it down?
To calculate the difference in interest earned on the savings account and the interest accrued on the credit card, we need to first determine the monthly interest earned on the savings account and the monthly interest accrued on the credit card.
Monthly interest earned on the savings account:
Principal amount = $300
Annual interest rate = 3.0%
Monthly interest rate = 3.0% / 12 = 0.25%
Monthly interest earned = Principal amount * Monthly interest rate = $300 * 0.0025 = $0.75
Monthly interest accrued on the credit card:
Principal amount = original credit card balance = $5,000
Annual interest rate = 18.0%
Monthly interest rate = 18.0% / 12 = 1.5%
Monthly interest accrued = Principal amount * Monthly interest rate = $5,000 * 0.015 = $75
Difference in interest earned and interest accrued:
$0.75 (from savings account) - $75 (from credit card) = -$74.25
Therefore, the difference is -$74.25, meaning that if you put the $300 in a savings account instead of paying down your credit card, you would have accrued $74.25 more in interest on the credit card.