A credit card issuer offers an APR. of 22.08% and compounds interest daily. Which is it most likely to advertise, its APR or it's effective Interest rate?

Question

Moody

Mathematics

9 August, 13:13

A credit card issuer offers an APR. of 22.08% and compounds interest daily. Which is it most likely to advertise, its APR or it's effective Interest rate?

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Enrique · Answer 1

Answer: The credit card issuer will show APR which is 22.08% and not effective rate of interest. This is because Effective rate, when calculated with the formula given below will come as 24.67% which is 2.59% more and hence will make customers feel that they are paying more. r = [ { (1 + i / n) ^ (n) } - 1] * 100 Where i = APR/100 n = number of compounding periods which is 365 in this case as compounding is done daily. [ { (1 + 0.2208 / 365) ^ (365) } - 1] * 100