Question

Round to the nearest penny.

You owe $1,350.00 on a credit card with a 14.25% APR. You pay $300.00 at the beginning of the month. How much interest do you save by paying at the beginning of the month versus at the end of the month?
Imagine you put the $300 in a savings account earning 3.0% APR instead of using it to pay down your credit card as in Problem 3. What is the difference between the interest your savings account would earn that month vs. the interest that would accrue on your credit card that month if you didn't use the $300 to pay it down?

Answer 1

Monthly interest rate = APR/12 = 14.25%/12 = 0.011875.

1) Interest saved by paying $300 at the beginning vs end of month
= $300 × 0.011875 = $3.5625 → $3.56 saved.

2) If you instead put $300 in a savings account at 3.0% APR:
savings monthly rate = 0.03/12 = 0.0025
interest earned = $300 × 0.0025 = $0.75.

Difference (credit card interest − savings interest) = $3.5625 − $0.75 = $2.8125 → $2.81.

So you save $3.56 in card interest by paying at the start of the month. If you put the $300 in savings instead, you’d earn $0.75 but incur $3.56 in card interest — a net loss of $2.81 for the month.