Question

Problem 6-60 (algorithmic) D Assigned Media A Question Help Your FICO score makes a big difference in how lenders determine what interest rate to charge you. Consider the situation faced by Edward and Jorge. Edward has a fairly poor FICO score of 660 and, as a result, pays 17.0% APR on the unpaid balance of his credit card. Jorge has a FICO score of 740 and pays only 7.1% APR on the unpaid balance of his credit card. If both persons carry an average balance of $3,000 on their credit cards for three years, how much more money will Edward repay compared with what Jorge owes (moral: you want a high FICO score)? Assume monthly compounding of interest. Edward will repay $ more. (Round to the nearest dollar.)

Answer 1

t = 3*12 = 36 months

For Edward

i = 17% / 12 = 1.4167% per month

Loan due after three yrs = 3000*(F/P,1.4167%,36)

= 3000* (1 + 0.014167)^36

= 3000* (1.014167)^36

= 4978.09

For Jorge

i = 7.1% / 12 = 0.59167% per month

Loan due after three yrs = 3000*(F/P,0.59167%,36)

= 3000* (1 + 0.0059167)^36)

= 3000* (1.0059167)^36

= 3709.83

Diff in total payment = 4978.09 - 3709.83 = 1268.26 ~ 1268 (Nearest Dollar)