Credit Card Scenario (Homework #2) – Individual Financial Strategy Spring 2014

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1. You make a purchase for $6,000 on your credit card which has an annual interest rate of 13.99%. If you pay the minimum payment of 2% per month (not less than $25),

a. What is your balance after 5 years (60 months), assuming you make no other purchases with your credit card?  (15 points)

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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

 $6,000.00 =MAX(B2*0.02,25) =B2*0.1399/12 =B2-C2+D2

2

=E2 =MAX(B3*0.02,25) =B3*0.1399/12 =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.

b. If you only paid the minimum each month (and didn’t make any additional purchases!), how long would it take to pay off the balance?  (15 points)

c.  How much interest would you pay altogether?  (Sum the total interest paid EACH month from part b) (15 points)

2. Assume that you have a balance of $5,000 on a credit card that carries an annual percentage rate of 19%.   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*.19)/12     (15 points)

  1. Assuming that the scenario above doesn’t change, how long will it take to pay off the credit card debt? (15 points)
  2. How much interest would you pay in the end? (15 points)

3.  What is something you learned from either this homework or my lecture about credit cards that you did not know before. (10 points)

 

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