Problem

Suppose you have accumulated a credit card balance of $500, at an annual interest rate of 10 percent. You are also planning to open a new savings account that accumulates interest at an annual rate of 3 percent. You just got your paycheck and have $200 that you can use either to pay down your debt or open your savings account.

a. If you use the full $200 to pay down your debt, what will your credit card balance be in one year? Assume no additional credit card payments during this time.

b. If, instead, you put the full $200 into your savings account, what will be the balance in your savings account in one year, assuming you make no additional deposits during this time? What will your credit card balance be, assuming you make no additional payments during this time because your payment requirements have been deferred for one year?

c. In one year, how much money will you have lost if you deposit the $200 in your savings account compared to paying down your credit card?