Scenario #1 (paying minimum balances). You are broke and furnishing your first apartment after leaving the dorms (yeah!) You make a purchase for $6,500 on your credit card for all types of miscellaneous things you need. The credit card has an annual interest rate of 16.99%, the student rate you received when you were in college. If you pay the minimum payment of 2% per month (not less than $25),
1. What is your balance after 3 years (36 months), assuming you make no other purchases with your credit card? Again you are paying the minimum amount only.
Make a table in Excel that looks like: (you can copy and paste this - it will work)
|
Month
|
Credit card balance at beginning of month
|
Payment at end of month
|
Interest for month
|
Credit card balance at end of month
|
|
1
|
$6,500.00
|
=MAX(B2*0.02,25)
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=B2*0.1699/12
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=B2-C2+D2
|
|
2
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=E2
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=MAX(B3*0.02,25)
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=B3*0.1699/12
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=B3-C3+D3
|
and continue the pattern. The Excel function MAX will calculate which value is the greater option between minimum payment of 2% or $25.
2. Continue on with #1 above... let's say you only paid the minimum each month (and didn't make any additional purchases), how long would it take to pay off the balance?
3. How much interest would you pay IN TOTAL from #2 if you only paid the minimum balance until it was paid in full?
Scenario #2 (making extra payments without charging additional things). Assume that you have a balance on a store credit card (like a Best Buy or Macy's) of $3,000 that carries an annual percentage rate of 24%. You start making monthly payments of $200, determined to pay off the balance quickly..
Make a table that shows month, beginning balance, payment, interest, and ending balance. Make sure you change the INTEREST column above to be (B2*.24)/12
How long will it take you to pay off the balance?
How much total interest would you pay?
Scenario #3 (making extra payments and continuing charging new items). Assume that you have a balance on a Visa credit card of $5,000 from a crazy spring break vacation we don't want to discuss in class.
This card carries an annual percentage rate of 21% because your credit just wasn't great. You start making monthly payments of $200, but at the same time you charge an additional $125 per month (assume that this charge is made at the end of the month and interest is calculated on the balance before the charge is added).
Make a table that shows month, beginning balance, payment, interest, charge amount, and end balance. Make sure you change the INTEREST column above to be (B2*.21)/12
Assuming that the scenario above doesn't change, how long will it take to pay off the credit card debt?
How much interest would you pay in the end?
What is unique about Scenario #3 compared to the other two Scenarios?
Cite a reason (research online and cite the source) of why people can find themselves in credit debt - make it at least a paragraph.