Math 1050 Credit Card Debt Assignment

Name _________________________________

Molina Phear

You ha e re ei ed your o thly redit ard state e t a d ust o deal ith the fi a ial realities of last o ths birthday celebration. While your milestone in years was deserving of a celebration, dealing with the $2000 in credit card charges will require some planning. Your credit card statement lists the APR (Annual Percentage Rate) for your balance to be 14.5% . This is the yearly interest rate the credit card company uses in calculating interest due on your balance. The credit card company compounds interest monthly. Your monthly interest rate on credit card charges will be:

APR 0.145 0.012083 12 12

The minimum payment required by your credit card company is $25/month. Assuming that you do not make any new charges to your account, answer the following questions to help you determine the best plan for paying off this credit card debt. 1. To egi ith, lets he k out the pla of o ly payi g the i i u a ou t due ea h o th. To get a feel for ho this will affect the balance, finish filling in the following table using the minimum monthly payment of $25. Month 1 2 3 4 5 6 7 8 9 10 11 12 Old Balance $2000.00 $1999.17
$1998.33 $1997.48

Interest $24.17

$24.16 $24.15

Payment $25.00 $25.00

$25.00

New Balance $1999.17

$1998.33

$1997.48
$1996.62

$24.14
$24.13

$1996.62
$1995.75

$24.11
$24.10
$24.09

$1994.86

$25.00 $25.00 $25.00 $25.00

$25.00

$1995.75

$1994.86
$1993.96

$1993.96
$1993.05
$1992.13

$24.08

$25.00
$25.00

$24.07
$24.06

$1993.05 $1992.13 $1991.20

$1991.20
$1990.26

$25.00

$24.05

$25.00

$1990.26 $1989.31

What is the total amount that has been paid to the credit card company at the end of the first year?

$25 * 12 = $300.00
How much of the original balance has been paid off at the end of the first year?

$2000.00 - $1989.31 = $10.69

From looking at the new balances over the first year, how many years do you think it will take to pay off the $2000? (This is a guess so there is no wrong answer. Before going on to step 2, write down your best estimate.)

20 years

Math 1050 Credit Card Debt Assignment

Name _________________________________

Molina Phear

2. A formula for calculating the payment, P , required to pay off a debt of amount D in M months with monthly interest rate i is

1 1 i

D i

Using this formula, solve for M to determine the number of months it will take to pay off the $2000 credit card debt with minimum monthly payments of $25. Round the number of months to two decimal places. (Attach all work for this assignment to the end.) 1 - (1.012083) = 0.96664 -M = ln 0.03336
25 = 2000 (0.012083) 1 - ( 1 + 0.012083) (25)( 1 - (1.012083)) = 24.166 -(1.012083) = - 0.03336 1.012083 = 0.03336 ln 1.012083 -M = -283.1167823 ~ 283.12 M = 283.1167823 ~

283.12 months

How long is this in years, rounded to the nearest tenth of a year?

~ 283.12/12 = 23.59306519 ~

23.6 years

What is the total amount paid to the credit card company, rounded to the nearest dollar?

$25 * 283.12 = $ 7078.00

3. How many months will be required to pay off the debt if you pay $50 each month? Round to two decimal places.
50 = 2000(0.012083) 1 - (1.012083) (50)(1 - (1.012083) ) = 24.166 1 - (1.012083) - (1.012083) 1.012083 = 0.48332 = - 0.51668 = 0.51668 - M = ln 0.51668 ln 1.012083 - M = -54.97914085 M = 54.97914085

~ ~ 54.98

54.98 months

How long is this in years, rounded to the nearest tenth of a year?

54.98 / 12 = 4.581595071 ~ ~

4.6 years

What is the total amount paid to the credit card company, rounded to the nearest dollar?

$50 * 54.98 = $ 2749.00

4. How many months will be required to pay off the debt if you pay $75 each month? Round to two decimal places.
75 = 2000 (0.012083) 1 - ( 1.012083) (75)(1 - (1.012083)) = 24.166 1 - (1.012083) = 0.322213333 1.012083 = - 0.677786667 - M = ln 0.677786667 ln 1.012083 - M = - 32.38166548 M = 32.38166548

32.38

32.38 months

How long is this in years, rounded to the nearest tenth of a year?

32.38/12 = 2.698472123 ~ ~

2.7 years

What is the total amount paid to the credit card company, rounded to the nearest dollar?

$75 * 32.38 = $ 2428.62 ~ ~

$2429.00

Math 1050 Credit Card Debt Assignment

Name _________________________________

Molina Phear

5. How large would your monthly payment have to be in order to pay off your debt in 12 months? Round up to the next nearest cent.

PMT = 2000 (0.012083) 1 - (1 + 0.012083) - 12 = 180.044715

$180.04 per month

What is the total amount paid to the credit card company, rounded to the nearest dollar?

$180.04 * 12 = $2160.48

$2161.00

6. What is the best plan for paying off the $2000? Why?
The best way would be to pay off $2000 would to not have it accrue that much in the first place. However, of the four choices given, the best way to pay off the debt would be paying $108.04 per month for one year. This way, you pay less interest and get the debt paid off in less time.

What is the worst plan? Why?

The worst plan is to make only the minimum payment of $25 per month. By the time you pay off the debt, you'd have paid more than three times the amount you owe. This may seem ideal as to save money, especially if you're on a budget. However, it takes much longer and you pay more in interest than you do the debt you owe.

What should you do if you cannot afford to make the payments required by the best plan?

If you cannot afford to make payments required by the best plan, you should lower you payments to something that you can afford such as $50 per month or $75 per month. I would only choose paying $25 per month as a last option.

7. What are two things that the average consumer can learn by completing this assignment? i.
The average consumer can learn how to manage their finances better and they learn about interest payments and what amount of money goes where.

ii.

A consumer can learn how to make different payment plans and choose the best option to which fits their finances.