Credit Cards
How a Credit Card Works
When you use a credit card, you are really borrowing money from a bank… The bank pays the store… at the end of the month the bank sends you a bill and you pay them back…
What is the advantage for the bank? They charge you money to borrow money from them. This is called “Interest.” Interest is based on something called an APR – Annual Percentage Rate. The APR is used to calculate what percent of your debt you pay back to the bank each month. Annual means it is a rate that is given for a 12-month period. By dividing the APR by 12, you can determine what the monthly percent you will be charged as interest.
You can use the compound ineterest formula when dealing with borrowing money from a bank.
y=a1+rnnt
y:amount owed to bank
a:initial amount borrowed
n:number of times per year it's compunded
r=interest rate as a decimal
t=time in years
Example: You put a $1,600 television on your credit card. The interest you owe is compounded monthly at 6.99 % for 8 years.
a. How much total will you owe after the 8 years?
y=16001+.06991212(8)=$2,794.30
b. Your minimum monthly payment must be 3% of the total balance. What would that be?
3% of 2,794.30 is $83.83
c. If you only pay the minimum each month, how long will it take you to pay off your total balance?
2,794.3083.83=33.33 months
Assignment on back!
Your turn…. NAME __________________________________________ Per ______
Look up and write down a single item that you would like to buy and its cost
Item: _________________________________________ Cost: ____________________
Below are 2 different credit card offers to consider.
“Eagle” Credit Card 1: APR of 11.99% compounded monthly for 8 years.
“Express” Credit Card 2: APR of 9.95% compounded monthly for 12 years.
Answer the following Questions: Show ALL work and write in complete sentences.
1. Compute your total balance after the 8 years if you use “Eagle”
2. Compute your total balance after the 12 years if you use “Express”
3. Your minimum monthly payment for each cards must be 2% of the total balance. Compute your minimum monthly payment for each card. Then determine how many months it would take you to pay off each card.
4. Which credit card would you go with and why?
5. How did this assignment make you feel about using a credit card?