Analysis of Credit Card Debt
Analysis of Credit Card Debt
Credit card debt is a reality for many in today’s world. Suppose that you had a $5,270.00 balance on a credit card with an annual percentage rate (APR) of 15.53 percent. Consider the following questions and prepare a report based upon your conclusions. 1. Most credit cards require that you pay a minimum monthly payment of two percent of the balance. Based upon a balance of $5,270.00, what would be the minimum monthly payment (assuming no other fees are being applied)? $105.40 $5270* .02= $105.40
2. Considering the minimum payment you just calculated, determine the amount of interest and the amount that was applied to reduce the principal. Hint: You’ll need to find the total interest for the year first. Annual interest $818.43 divide by 12 months= Interest paid: $68.20 principal paid: $37.20 $5270*.1553= $818.43
3. Consider one of your credit cards. What is the balance? How is the minimum monthly payment determined? What would be the minimum payment? How much of the minimum payment goes towards interest? How much of the minimum payment goes towards the principal? If you do not want to share an actual balance or do not have a credit card, calculate these amounts using an imaginary credit card balance. A.) My balance is $3,225 with 18% APR. Minimum payment is 3% of the Balance shown on billing statement or $20 whichever is greater. B.) My minimum payment would be $96.75
$3,225 * .03= $96.75
C.) Amount applied to interest $48.38
Interest= $580.50 for the year (assuming no extra fee or purchases were applied). $3225*.18= $580.50
D.) Amount applied to principal= $48.37
4. Now, examine the terms of one of your credit cards or other revolving debt. Are there other charges that the credit card company is applying to your account? Are you receiving a special rate for a limited time? Does your card charge an annual service charge or an inactivity fee? My credit card will apply late fees or bounce check fees. The fees are $35 for a late fee for any payment received after 10 day for my due date and a $35 bounce check fee for any check returned for nonpayment. I do not get charged these fees because they will add up quickly and you are also paying interest on them after the first 30days.
When I originally received 7 years ago, the card I did have a special rate for transferring over any balance from another credit card. I was zero interest for a year for any balance transferred over from another credit card. I transfer my balance of $1,275 from a higher interest card to this one and paid the balance off in about 9 months to take advantage of the zero interest. The card I transferred it from was at 18% interest.
I do not get charged either an annual service charge or an inactivity fee, thankfully.
5. Examine a credit card bill (or other revolving debt) and see how long it will take to pay off your debt if you paid only the minimum payments (you can also use an online calculator like the one at http://www.bankrate.com/calculators/managing-debt/minimum-payment-calculator.aspx). What steps could you take to pay off this credit card (or debt) sooner? Determine the percentage of the principal that you need to pay down in order to pay off the credit card in the time frame of your choosing. My balance is $3,225 APR 18% with 3% minimum payment or $15 whichever is greater. If I only made the minimum payment with no other charges or fee added it would take 170 months to pay off the balance or 14 years and 3 months. The total amount paid would be $6150.11; principal of $3225.00 plus $2925.11 of interest. Source Information: Bankrate.com
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