Question

Suppose you have a balance of $3000 on a credit card. Using the formula from Part G, consider the following scenarios: 1. The APR (Annual Percentage Rate) is 14.24% You make the minimum payment of $120 per month. How long does it take you to pay off your debt? How much do you end up spending in total? 2. The APR is 25.24%. You make the minimum payment of $120 per month. How long does it take you to pay off your debt? How much do you end up spending in total? 3. The APR is 25.24%. You pay more than the minimum payment. You decide to pay an extra $50 per month. So you pay $170 per month. How long does it take you to pay off the loan? What is your total cost? How much do you save compared to making the minimum payment? 4. Why is it important to make more than a minimum payment?

Answer 1

Req 1 Balance Minimum Outstanding Period Interest at Begg. Payment Balance at end 3,000.00 35.60 120.00 2,915.60 2,915.60 34.60 120.00 2,830.20 2,830.20 33.59 120.00 2,743.78 2,743.78 32.56 120.00 2,656.34 2,656.34 31.52 120.00 2,567.86 2,567.86 30.47 120.00 2,478.34 2,478.34 29.41 120.00 2,387.75 2,387.75 28.33 120.00 2,296.08 2,296.08 27.25 120.00 2,203.33 2,203.33 26.15 120.00 2,109.47 2,109.47 25.03 120.00 2,014.51 2,014.51 23.91 120.00 1,918.41 1,918.41 22.77 120.00 1,821.18 1,821.18 21.61 120.00 1,722.79 1,722.79 20.44 120.00 1,623.23 1,623.23 19.26 120.00 1,522.49 1,522.49 18.07 120.00 1,420.56 1,420.56 16.86 120.00 1,317.42 1,317.42 15.63 120.00 1,213.05 1,213.05 120.00 1,107.45 1,107.45 13.14 120.00 1,000.59 1,000.59 11.87 120.00 892.46 892.46 10.59 120.00 783.05 783.05 9.29 120.00 672.35 672.35 7.98 120.00 560.32 560.32 6.65 120.00 446.97 27 446.97 5.30 120.00 332.28 332.28 3.94 120.00 216.22 216.22 2.57 120.00 98.79 98.79 1.17 120.00 -20.04 579.96 It would take about 30 months to clear the debt entirely You will be paying staggering $579.96 in Interest over the debt component of $3000 14.39 3,579.96 Req 2 Period Balance Minimum Outstanding Interest at Begg Payment Balance at end 3,000.00 63.10 120.00 2,943.10 2,943.10 61.90 120.00 2,885.00 2,885.00 60.68 120.00 2,825.68 2,825.68 59.43 120.00 2,765.12 2,765.12 58.16 120.00 2,703.28 2,703.28 56.86 120.00 2,640.14 2,640.14 55.53 120.00 2,575.67 2,575.67 54.17 120.00 2,509.84 2,509.84 52.79 120.00 2,442.63 2,442.63 51.38 120.00 2,374.01 2,374.01 49.93 120.00 2,303.94 2,303.94 48.46 120.00 2,232.40 2,232.40 46.95 120.00 2,159.36 | 2,159.36 45.42 120.00 2,084.78 2,084.78 43.85 120.00 2,008.63 2,008.63 42.25 120.00 1,930.87 1,930.87 40.61 120.00 1,851.49 1,851.49 38.94 120.00 1,770.43 1,770.43 37.24 120.00 1,687.67 1,687.67 35.50 120.00 1,603.16 1,603.16 33.72 120.00 1,516.88 1,516.88 31.91 120.00 1,428.79 1,428.79 30.05 120.00 1,338.84 1,338.84 28.16 120.00 1,247.00 1,247.00 26.23 120.00 1,153.23 26 1,153.23 24.26 120.00 1,057.49 1,057.49 22.24 120.00 959.73 959.73 20.19 120.00 859.92 859.92 18.09 120.00 758.00 758.00 15.94 120.00 653.95 653.95 13.75 120.00 547.70 547.70 11.52 120.00 439.22 439.22 9.24 120.00 328.46 328.46 6.91 120.00 215.37 35 215.37 4.53 120.00 99.90 | 36 99.90 2.10 120.00 -18.00 1,302.00 It would take about 36 months to clear the debt entirely You will be paying staggering $1302 in Interest over the debt 4,302.00 component of $3000 Req3 12 Balance, Minimum Outstanding Period Interest at Begg. Payment Balance at end 3,000.00 63.10 170.00 2,893.10 2,893.10 60.85 170.00 2,783.95 2,783.95 58.56 170.00 2,672.51 2,672.51 56.21 170.00 2,558.72 53.82 170.00 2,442.54 2,442.54 51.37|| 2,323.91 2,323.91 48.88 170.00 2,202.79 2,202.79 46.33 170.00 2,079.12 2.079.12 43.73 170.00 1,952.85 1,952.85 41.08 170.00 1,823.93 1,823.93 38.36 170.00 1,692.29 1,692.29 35.59 170.00 1,557.89 1,557.89 32.77 170.00 1,420.66 14 1,420.66 29.88 170.00 1,280.54 1,280.54 26.93 170.00 1,137.47 1,137.47 23.92 170.00 991.40 991.40 20.85 170.00 842.25 18 8 42.25 17.72 170.00 689.96 689.96 14.51 170.00 534.47 534.47 11.24 170.00 375.72 375.72 7.90 170.00 213.62 213.62 4.49 170.00 48.11 23 48.11 1.01 170.00 -120.88 789.12 3 ,910.00 It would take about 23 months to clear the debt entirely You will be paying staggering $789.12 in Interest over the debt component of $3000 We will be able to save $ 512.88 (1302-789.12) 3,789.12 As you can analyse from the above three scenarios, the minimum payment is certainly easier to make, it typically costs much more in the long run than if you paid your balance in full. If you have funds with you, it is always better to clear your debts to avoid the Interest burden. By paying more than the minimum payment over your credit card, following benefits you can avail: 1) You will save money on Interest 2) You will be able to pay-off your debt balance sooner 3) You will be able to improve your credit score 4) You will be able to increase your credit limit availability faster