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Why get a credit card? The main reason is to establish a good credit rating which will enable you to borrow money for a car or a house at a lower rate. Having a lower rate on a mortgage can save big bucks!
7%?
8%?
9%
Lets look at the difference between what you would pay for a 30-year $200,000 mortgage with interest rates of 7%, 8% and 9%.
Use Excel to find the monthly payment for a $200,000 30-year mortgage with a 7% annual interest rate. $1330.60 The total amount paid by you for this mortgage over 30 years is $479,016. How was this amount determined?
Big Difference!
Interest Rate 7% 8% 9% Total Cost of $200,000 Mortgage $479,016 $531,551 $579,330
Credit Cards
However, do not get a credit card if you are not mature enough to handle it wisely. If you do not handle your credit card wisely you will foolishly pay lots of unnecessary finance charges and late charges and other charges as well. You will also create a bad credit rating for yourself which will make you pay lots of extra interest on mortgages, as we saw above, and car loans also.
Finance Charges
Assume that you have carried over a $2000 balance from the Previous month. Never get in this situation! If you make no new purchases but cant send in a check for the whole $2000 to reach them by the payment due date, how much interest will you be charged for this month? Suppose the card issuer charges a 15.99% APR, annual percentage rate, 0.1599/12 = .013325 = 1.3325 % is the monthly interest rate. The finance charge is the monthly interest rate times the balance 0.013325($2000) = $26.65 Of course if you make additional charges during the month, you will pay finance charges, interest, on that money as well.
Finance Charges
What would the monthly finance charge be for a balance of $850 with an APR of 22.99%?
Late Charges and Over-Credit Limit charges are likely to be more costly than finance charges.
Variable APR: See explanation 1 below for Default APR and 2 for Variable-Rate Information.
16.99%
Default APR: Up to 29.99% for all Purchase, Balance Transfer, and Cash Advance balances if late or overlimit. This is not a variable rate. See 1 below for explanation.
Transaction fee for Balance Transfers, non-online Direct Deposits and Check Cash Advances: 4% of each such cash advance (minimum $10, maximum $90). Transaction fee for Bank and ATM Cash Advances and online Direct Deposits: 4% of each such cash advance (minimum $5). Transaction fee for Overdraft Protection Bank Cash Advances (if enrolled): 4% of each such cash advance (minimum $5). Transaction fee for Cash Equivalents: 5% of each such cash advance (minimum $25).
We reserve the right to change the APRs in our discretion, including, for example, the margins.
?!?
1 Each time your minimum payment is late (i.e., not received by 5 p.m., ET, on its Payment Due Date), or the account balance is over the credit limit, we may increase each of your account's Variable APRs up to the Default APR. The Default APR will be applied to all new and outstanding balances with Variable APRs then below the Default APR. If a Default APR is applied to your account, then all APRs, including APRs then at or above the Default APR, will no longer vary.
2 The U.S. Prime Rate used to determine your APRs for each billing cycle is the highest rate appearing in The Wall Street Journal on the last publication date of the calendar month that ends within that billing cycle. On January 31, 2008, the U.S. Prime Rate was 6.00%.
We reserve the right to change the APRs in our discretion, including, for example, the margins.
Rewards: Earn a full 1% on all purchases after your total annual purchases exceed $3,000. Purchases that are part of your first $1500 earn 0.25% and purchases that are part of your second $1500 earn 0.50%
Month 1. Michael gets the credit card with the above cash back rule. He charges $290 in books, knowing there is some cash back reward for using this credit card. He has only glanced at the fine print on his agreement and thinks his cash back reward will be 1% of the purchase price, but it wont be! Read his fine print carefully. 6. What will Michaels cash back reward actually be?
Lets assume that Michael charges the books on the first day of his account period, so the finance charge is monthly interest for a complete month. When calculating the finance charge, be sure to divide the annual percentage rate (APR) by 12 to get the monthly rate.
Assume Michaels minimum payment is 2% of his new balance. The credit card company will always tell you what your minimum payment is
If you dont send in at least this minimum payment reaching them by the due date, you will incur a late fee and your APR can also rise dramatically leading to higher finance charges.
Try to send in much more than the minimum payment since you want to pay off your balance as quickly as possible to save money on finance charges. Month 1 Beginning balance Purchases Balance if paid in full Finance charge Other fees New Balance Minimum payment 0 290 290 _____ _____ _____ _____
7. 8.
Determine Michaels finance charge, new balance and minimum payment. If Michael is short of money and sends in the minimum payment, what will his beginning balance be in Month 2?
$28.32
$2028.32 $40.57
$1987.75
$28.14 $27.97
$1975.57 $1963.47
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Actually we are summing a geometric series, with first term $2000 (0.1699/12) = $28.32 The next term will be $2000 (1 - 0.02 + 0.1699/12) (0.1699/12) So the constant ratio, r = 1 - 0.02 + 0.1699/12 (r is about 0.994) a ( 1 - r^n) / (1-r) The sum of all the finance charges is actually $2000 (0.1699/12) (1- 0.994^120) / 0.006 = $2447.58 (keeping more accuracy than shown here) So the arithmetic series approximation of $2540 was pretty good!!
Investing Early
If you put $200 into a 401(k) account monthly you would have 20 years
6%
40 years
$ 92,408.18 $ 398,298.15
10%
$151,873.77 $1,264,815.92