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Part 1 Start with a beginning balance of $5,000. The interest rate is set at 18.99% and the finance charge is calculated for you. Remember,
Part 1
- Start with a beginning balance of $5,000.
- The interest rate is set at 18.99% and the finance charge is calculated for you. Remember, if this is a new credit card, or a new charge, there is no finance charge in the first month as that is generally a grace period. Finance charges will begin in month 2 when there is a carry-over balance on the credit card.
- Use a monthly payment of $350 for the life of the credit card loan. Use the autofill feature.
- How many months until the credit card is paid off? How much is the final payment
Part 2
- Start with the same beginning balance of $5,000.
- Use a monthly payment of 10% of your new balance. (In Excel, use the formula: =0.10*D2 in cell E2) Use the autofill feature to at least 72 months (6 years).
- What do you notice?
- Will you ever pay off this loan?
Part 3
- Compare payment types from Part 1 (set amount each month) vs. Part 2 (percentage of your balance). What are your takeaways?
- Generally, the minimum payment on a credit card is calculated using a particular percent of your balance (or $25, whichever is larger). Why do you think credit card companies do this?
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