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6.2 Buying Now, Paying Later

6.2 Buying Now, Paying Later
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  • 7. Making Payments on Credit Cards

    You have had a credit card for 2 years. Use the terms and conditions below that apply to your credit card.

    You have the lowest possible APR. You use the credit card to purchase 3 nights in a hotel for a total of $350. Your bill also includes $250 from last month. The minimum payment each month is $15. How long does it take to pay the credit card bill by making only the minimum payment each month? How much do you pay in interest? (See Example 3 and Example 4.)

    • Worked-Out Solution

      This is a difficult question. The best way to answer it is to create a spreadsheet showing the effect of minimum payments. From the spreadsheet, you can see that it would take 53 months to pay the balance on the credit card.

      By totaling the interest column, you can see that you would pay about $190.54 in interest.

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  • 8. Making Payments on Credit Cards

    You have had a credit card for 2 years. Use the terms and conditions below that apply to your credit card.

    You have the lowest possible APR. You use the credit card to purchase airplane tickets to Australia for $1500. Your bill also includes $591.50 from last month. The minimum payment is either 2% of your statement balance rounded to the nearest whole dollar or $15, whichever is greater. How long does it take to pay the credit card bill by making only the minimum payment each month? How much do you pay in interest? (See Example 3 and Example 4.)

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     __   __    _____               _____     _____   
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  • 9. Taking a Cash Advance

    You have had a credit card for 2 years. Use the terms and conditions below that apply to your credit card.

    You take a cash advance of $500. How long does it take to pay for the advance by making $50 payments each month? How much do you pay in interest? (See Example 3 and Example 4.)

    • Worked-Out Solution

      Notice that the annual percentage rate for cash advances is 24.24%.

      The spreadsheet shows the number of months it would take to pay off a cash advance for $500, by making $50 payments each month. By totaling the column for interest, you can determine that your total interest payment is $64.24.

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     `-----`   `-----`  `-----`    `-----`  `-`   `-` 
                                                      
    
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  • 10. Comparing Interest Rates

    You have had a credit card for 2 years. Use the terms and conditions below that apply to your credit card.

    Your credit card statement is shown. You plan to pay $300 each month. How much more do you pay in interest with the maximum APR than with the minimum APR? (Note: There is an interest charge after this month.) (See Example 3 and Example 4.)

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     /__//      \___//     \//     \____//  |______// 
     `--`       `---`       `       `---`   `------`  
                                                      
    
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  • 11. Comparing Interest Rates

    You can pay the $1730 credit card balance with a 2-year installment loan that has an APR of 6.5%, or a 1-year installment loan that has an APR of 9%. Which loan has a lesser cost of credit? How much do you save by choosing this loan? (See Example 3 and Example 4.)

    • Worked-Out Solution

      For a 24-month loan, the annual percentage rate is 6.5%. This implies that the monthly payment is

      The total paid during the 2 years is

      This implies that the cost of credit is

      For a 12-month loan, the annual percentage rate is 9%. This implies that the monthly payment is

      The total paid during the year is

      This implies that the cost of credit is

      So, the one year loan has the lesser cost of credit. It costs

      less than the two-year loan.

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       _____     ___       _____    ______    ______  
      / ___//   / _ \\    / ___//  /_   _//  /_____// 
      \___ \\  / //\ \\   \___ \\   -| ||-   `____ `  
      /    // |  ___  ||  /    //   _| ||_   /___//   
     /____//  |_||  |_|| /____//   /_____//  `__ `    
    `-----`   `-`   `-` `-----`    `-----`   /_//     
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  • 12. Paying Debt

    Your credit card balance is $500. You can afford to pay $100 each month toward the balance. Should you do this or should you make the minimum payment of $20 each month? Explain your reasoning.

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    `-`  `-`   `-----`  `------`    `---`    /_//     
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