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Credit Cards, APR, and Paying the Balance

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1. Your friend has a credit card with an APR of 49.9%! What would his finance charge be on a $500 charge for just 1 month?

2. Your friend has 2 credit cards with balances that he cannot afford to pay off all at once. A $500 balance on a card with 15.99% APR and a $400 card with a %25.99. Calculate the monthly finance charges on each. What advice would you give your friend about paying off the balances on these cards?

3. With a beginning balance of $1200 and no additional charges during the next three months, you will just pay the minimum payment each month for the next three months. The APR is 24.99% and the minimum payment each month is 3% of the balance. Determine the finance charge, new balance, and minimum payment required for each of the next three months, and the starting balance for month 4 in the table below:

Month Starting balance Finance charge New balance Minimum payment
1 $1200
2
3
4

a. What is the total of the minimum payments?

b. What is the total of the finance charges?

c. How much does the starting balance decrease after these three payments?

d. Your finance charge is what percent of your payments?

e. Explain why making the minimum payment all the time is great for the credit card company, but not so great for the user.

f. Explain why having a credit card and using it wisely is beneficial to you.

4. You open a credit card account and you charge $100 to the account on the first of each month to pay for your cable and internet subscription. You plan to pay just the minimum amount each month for this first 6 months until your summer job starts. The APR is 24.99% and the minimum payment is 3% of the balance. Fill in the table below:

Month Starting balance New Purchases Bal + Purch Finance charge New balance Minimum payment
1 $0 $100 $100
2 $100
3 $100
4 $100
5 $100
6 $100
7

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Solution Preview

1)
49.9 / 100 / 12 * $500 = $20.79
The finance charge is $20.79.

2)
Compute the monthly finance charges as shown below.
15.99 / 100 / 12 * $500 = $6.66
25.99 / 100 / 12 * $400 = $8.66
Since $8.66 is more than $6.66, I would advise him to pay the $400 balance off first before paying on the $500 balance.

3)

Month Starting balance Finance charge New balance Minimum payment
1 $1,200 $24.99 $1,224.99 $36.75
2 $1,188.24 $24.75 $1,212.99 $36.39
3 $1,176.60 ...

Solution Summary

The Excel file provides step-by-step computations. The Word file provides a summary of the solutions.

$2.19