Analysis of Credit Card Debt

895 words | 3 page(s)

1. Based upon a balance of $5,270.00, what would be the minimum monthly payment (assuming no other fees are being applied)?
Assuming that the annual percentage rate for this credit card is 15.53%, and that the minimum monthly payment for the card issuer is 2%, the minimum monthly payment for this card would be:
$5,270 x .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.
Of the $105.40 minimum payment, it is important to note that not all of this payment will go to paying off the principle of the credit card balance. Rather, a portion of the payment will go towards paying the interest. As a result, the amount applied to interest and the amount applied to principle for the $105.40 credit card payment would be as follows:
$5270 x 15.53% = 818.43
818.43 / 12 = $68.20
$105.40 – $68.20 = $37.20
As a result, of the $105.40 credit card payment, $68.20 would go to pay accrued interest and only $37.20 would go towards paying down the principle.

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3. Consider one of your credit cards.
a. What is the balance?
$844.16
b. How is the minimum monthly payment determined?
4% of the total credit card balance
c. What would be the minimum payment?
$844.16 x .04 = $33.77
d. How much of the minimum payment goes towards interest?
$844.16 x 18.99% = $160.31
$160.31 / 12 = $13.36
e. How much of the minimum payment goes towards the principal?
$33.77 – $13.36 = $20.41

4. Now, examine the terms of one of your credit cards or other revolving debt.
a. Are there other charges that the credit card company is applying to your account?
Over limit fee of $35 and late fee of $35
b. Are you receiving a special rate for a limited time?
No
c. Does your card charge an annual service charge or an inactivity fee?
Yes, Annual Service Charge of $50

5. Examine a credit card bill (or other revolving debt) and:
a. 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).
Assuming that the minimum payment remains 4% of the credit card balance, until the minimum payment falls to $15.00 a month, which will lead to the minimum payment being $15 a month for the duration of the payment cycle, it will take 66 months to pay off the balance of a credit card with $844.16 balance, 18.99% APR and a 4% minimum monthly payment (Bizrate, 2013).

b. What steps could you take to pay off this credit card (or debt) sooner?
Essentially, any amount that is paid above the minimum required payment will result in the credit card balance being paid off sooner. Particularly, the higher the monthly payment that is made, the quicker the balance will be paid off and the less interest the amount of interest that will accrue and need to be paid. This effect is compounded if larger payments are made in the early months of having the credit card debt. Doing so ensures that less interest is able to accrue, more of the payment is applied to principle, and the overall balance is paid off far sooner.

c. 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.
Rather than the 66 months it would take to pay off the credit card balance when making only the minimum payment, it would be preferable to pay off the $844.16 balance in 12 months. To do so, the percentage of principle that would need to be paid each month would be the following:
$844.16 x 18.99% = $160.31
$160.31 / 12 = 13.36
$77.79 – $13.36 = $64.43
7.63%

6. Many Americans find themselves amassing large amounts of credit card (or other revolving) debt at an early age. What advice concerning the use of credit cards and the fees they charge would you provide to a young adult planning on getting a credit card?

The thing to remember is when using a credit card to pay for purchases, the charges made must eventually be paid for. What’s more is that the card holder will be charged interest, sometimes very high interest, for any balance on the card that remains unpaid. As a result, I would recommend to young adults to first rely on cash for purchases. If the individual does not have money, then they don’t need to make the purchase. Beyond this, it is perfectly find to get a credit card for use in case of emergencies or to help build the person’s credit. That does not mean the individual should get a credit card with a $2000 spending limit. Rather, I would recommend obtaining a credit card with between a $250 – $500 credit limit. With this low balance, the individual should for the most part be able to pay off any balance on the card each month, and thusly, avoid the accrual and payment of any interest (Wang, 2012). This will significantly help the young adult to build a strong credit history, learn about credit responsibility, and ensure the individual does not get in over their head with credit card debt.

    References
  • Bizrate. (2013, July 1). Credit card calculator: The true cost of paying the minimum. Retrieved from Bizrate Web site: http://www.bankrate.com/calculators/managing-debt/minimum-payment-calculator.aspx
  • Wang, J. (2012, April 23). 5 strategies to pay down credit card debt. Retrieved from U.S. News and World Report Web site: http://money.usnews.com/money/blogs/my-money/2012/04/23/5-strategies-to-pay-down-credit-card-debt

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