Question

APA Cita... Assignme... Assignme... Assignme... Assignme... Heading 0 Heading ont Paragraph Styles The Cost of Credit Card Usage Worksheet Review Ch. 5 of Focus on Personal Finance, your Week 3 Khan Academy Video, and your iGrad Credit Card Module for support in completing this assignment. 1. Calculate the following using the Bankrate calculator. You may use the Bankrate calculator for the remainder of the questions on this worksheet. Total Interest Minimum/FixedNumber of Payment Credit Card Interest Rate Months to Pay in Paid Full Balance Impact of Interest Rates $5,000 $5,000 Impact of Payment Amounts 13% Minimum (interest +1% of balance) Minimum 18% (interest +1% of balance) Minimumm (interest +1% of balance Fixed $100 $2,000 15% $2,000 15% 2. In the-Impact of Interest Rates" example, a 5% interest rate difference results in how much extra interest paid when making only a required minimum monthly payment equal to the monthly interest plus 1% of the outstanding balance? 叩 g.

Answer 1

1
Credit card balance	Interest rate	Min/ Fixed payment	Min/ Fixed payment	No of months to pay in full	Total interest paid
Impact of interest rate
5000	13%	Int+1% balance	104.2	100.0	2735.42
5000	18%	Int+1% balance	125.0	100.0	3787.5
				Interest differential	1052.08
Impact of payment amounts
2000	15%	Int+1% balance	45.0	100.0	1262.5
2000	15%	100	100	23.2	315.89
				Interest differential	-946.61

sample calculation-

Note- Since we are making only 1% of principal payment each month, it will take 100/1=100 months to repay the complete principal or credit balance. It Should be noted that the amount paid each month goes reducing each month as we go on making the payments. Also, the 1% of balance is assumed as the fixed amount as a % of initial balance and not reducing balance which is the standard practice.

The questions require the use of financial calculator. It is assumed that the working is not required. However, I have posted a sample calculation in excel for reference due to space constraint

2

5% extra interest paid equals 2735.42-3787.5= $1052.08 extra interest paid

3

The $100 fixed payment saves us 1262.5-315.89= $946.61 of interest amount

4

The $100 fixed payment helps us payback the balance in 23.2 ~24 months as compared to 100 months by minimum payment which is a save of 76 months

5

Based on these calculations, it is evident that a fixed payment of $100 is a better way to pay off the credit card balance as compared to making only the minimum payment. This is clearly seen from a save of $946 in total interest paid and 76 months earlier payment. The reason being- with fixed payment, larger amount of principal is deducted in the later life of the loan. While in minimum payment, the amount of principal repid evry month remains the same. The total amount paid in later life of the loan goes on reducing as the interest portion goes down.

7

In order to properly using credit cards, it advisable to pay off the full amount due at the end of every credit cycle. Any delays in payments cause a considerable amount of financial charges and interest. Additionally, when we make only the minimum payment, the repayment period extends to more than 8 years, which is very high. The interest paid over this time is also very high- depending on the interest rate charged by the credit card company. If at all you have to carry forward the balance, try to pay a fixed amount (above min payment required) every month rather than only paying the min payment due.

6

As we use the card during the month, our credit balance will keep piling up. It is advised to pay off the full balance due at the end of each credit cycle. If not possible, the next best thing to do is to make a fixed payment every month. Making couple of large payments is even better. Making only the min payment is the worst of all options as it will take up a huge amount of money in the form of carried forward interest. As we continue using the credit card, we may never be able to pay off the full balance with this method.