Credit card A is running a promotion where they will charge 0% interest for the first year, and then 0.8% interest compounded continuously after that. Credit card B has an interest rate of 0.7%, also compounded continuously. If you are going to make a $500 dollar purchase and plan to not make a single payment for 2.5 years, which credit card would you go with? Explain for answer in 1-2 sentences.

Question

Mathematics

Whitehead

1 June, 17:28

Credit card A is running a promotion where they will charge 0% interest for the first year, and then 0.8% interest compounded continuously after that. Credit card B has an interest rate of 0.7%, also compounded continuously. If you are going to make a $500 dollar purchase and plan to not make a single payment for 2.5 years, which credit card would you go with? Explain for answer in 1-2 sentences.

+1

Answers (1)

Know the Answer?

Ashly · Answer 1

Since the total amount you have to pay for the purchase on the credit card A is lower, then it's the best option.

Step-by-step explanation:

For credit card A the ammount will only be compounded after 1 year, so the total time elapsed for the laon is 1.5 years, while for the credit card B it'll be the full 2.5 years. To compute the total amount of a interest compounded continuously we must apply the formula:

M = C*e^ (r*t)

Where M is the total amount, C is the initial amount, r is the interest rate and t is the time elapsed.

For credit card A:

M = 500*e^ (0.008*1.5) = 506.03614

For credit card B:

M = 500*e^ (0.007*2.5) = 508.8270

Since the total amount you have to pay for the purchase on the credit card A is lower, then it's the best option.