hello,

can u help me on my homework. it is a project and my parents told me how to do it but im not sure if they are correct. so the question goes like this: dulani has a new credit card. it says: you can get cash advances wherever you are. whenever you want. also if you pay off your balance in full each month for a small transaction fee, the cash is interest free. (see important information on reverse side. On reverese side it says:

cash advance transaction fee:

$500 or less 2.5%;
$500.01 to $1000.00-2%;
$1000.01 or more -1.5%;
$2.00 minumum.

Annual percentage rater for cash advances 19.8%. dulani wants to know what a cash advance will really cost. Analyze the cash advance terms given here. how much would he pay for a $20 cash advance? What about a $450 cash advance? What annual interest rate are these charges equivalent to? choose other amounts. determine cost and annual ratees for these as well. make recommendations to dulani. can you just work out the answers and i want to compare the two answers to see if i was close. thanx

Hi,

First consider the $450 cash advance. What I understand is that you can get the $450 two different ways. One is to borrow it for one year at 19.8%. If this is your choice then at the end of the year you owe $450 plus 0.198*$450 = $89.10.

The second option is to take the monthly advance each month with no interest charge but a cash advance transaction fee. For $450 this transaction fee is 2.5%, that is 0.025*$450 = $11.25. If you do this every month then you pay 12*$11.25 = $135 for the year. The question now is "What percentage of $450 is $135?" That is

Find x if $135 = x*$450 Solving for x gives x = 0.30 = 30%.

Now try it for a $20 cash advance. 2.5% of 20 is $).50 so you have to pay the minimum charge of $2. In this case I got the annual interest rate to be 120%.

I hope this helps,
Penny
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