If your credit card company charges you 1% per month on your balance, what effective annual rate of interest is it charging?
To calculate the effective annual rate of interest, you need to consider compounding. In this case, the credit card company charges interest monthly.
To find the effective annual rate, follow these steps:
1. Convert the monthly interest rate to a decimal by dividing it by 100. In this case, the monthly interest rate is 1%. So, 1% / 100 = 0.01.
2. Add 1 to the monthly interest rate converted to a decimal. 0.01 + 1 = 1.01.
3. Raise the result from step 2 to the power of 12 (since there are 12 months in a year) to account for compounding. 1.01^12 ≈ 1.1268.
4. Subtract 1 from the result. 1.1268 - 1 = 0.1268.
5. Convert the result to a percentage by multiplying it by 100. 0.1268 * 100 ≈ 12.68.
Therefore, the effective annual rate of interest charged by the credit card company is approximately 12.68%.