Question

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?

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

Answer 2

Answer:

It's APR, because it's 2.62% less than its effective interest rate.