Fun With Calculators: The Tyranny of Credit Card Interest Rates

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Dec 19, 2014
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Activity, Credit Cards

Scenario:  You buy a $1,000 laptop before you head off to college and charge it to your new credit card.  When the first bill comes in the mail you hone in on the Minimum Payment (see NGPF’s lesson on Reading a Credit Card Statement) and pay 2% of your balance or $20 per month.  Your APR (annual percentage rate) on the card is 19% (a typical rate for a new cardholder).

Using this calculator and the Tables tab on the right hand side:

  1. How many months (and years) would it take for the student to pay off their credit card balance?
  2. How much would the student pay in interest for this purchase?
  3. If the student doubles their monthly payment to $40,
    1. How many months (and years) would it take for the student to pay off their credit card balance?
    2. How much would the student pay in interest for this purchase?
  4. What is the relationship between minimum payment amount and interest paid?  In other words, what impact did doubling the monthly payment have on interest paid and time to payoff the bill?

Hint:  Just as compound interest can help you when you are on the savings end, it really hurts you when you are a borrower (especially when interest rates are 19%!).

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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