Analysis of Credit Card Debt Essay

Analysis of Credit Card Debt
Credit card debt is a reality for many in today’s world. Suppose that you had a $5,270.00 balance on a credit card with an annual percentage rate (APR) of 15.53 percent. Consider the following questions and prepare a report based upon your conclusions. 1. Most credit cards require that you pay a minimum monthly payment of two percent of the balance. Based upon a balance of $5,270.00, what would be the minimum monthly payment (assuming no other fees are being applied)? $105.40 $5270* .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. Annual interest $818.43 divide by 12 months= Interest paid: $68.20 principal paid: $37.20 $5270*.1553= $818.43

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$818.43/12= $68.20
$105.40-$68.20= $37.20
3. Consider one of your credit cards. What is the balance? How is the minimum monthly payment determined? What would be the minimum payment? How much of the minimum payment goes towards interest? How much of the minimum payment goes towards the principal? If you do not want to share an actual balance or do not have a credit card, calculate these amounts using an imaginary credit card balance. A.) My balance is $3,225 with 18% APR. Minimum payment is 3% of the Balance shown on billing statement or $20 whichever is greater. B.) My minimum payment would be $96.75

$3,225 * .03= $96.75
C.) Amount applied to interest $48.38
Interest= $580.50 for the year (assuming no extra fee or purchases were applied). $3225*.18= $580.50
$580.50/12= $48.38
D.) Amount applied to principal= $48.37
$96.75-$48.38= 48.37
4. Now, examine the terms of one of your credit cards or other revolving debt. Are there other charges that the credit card company is applying to your account? Are you receiving a special rate for a limited time? Does your card charge an annual service charge or an inactivity fee? My credit card will apply late fees or bounce check fees. The fees are $35 for a late fee for any payment received after 10 day for my due date and a $35 bounce check fee for any check returned for nonpayment. I do not get charged these fees because they will add up quickly and you are also paying interest on them after the first 30days.

When I originally received 7 years ago, the card I did have a special rate for transferring over any balance from another credit card. I was zero interest for a year for any balance transferred over from another credit card. I transfer my balance of $1,275 from a higher interest card to this one and paid the balance off in about 9 months to take advantage of the zero interest. The card I transferred it from was at 18% interest.

I do not get charged either an annual service charge or an inactivity fee, thankfully.
5. Examine a credit card bill (or other revolving debt) and 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). What steps could you take to pay off this credit card (or debt) sooner? 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. My balance is $3,225 APR 18% with 3% minimum payment or $15 whichever is greater. If I only made the minimum payment with no other charges or fee added it would take 170 months to pay off the balance or 14 years and 3 months. The total amount paid would be $6150.11; principal of $3225.00 plus $2925.11 of interest. Source Information: Bankrate.com

MIN PMT
Interest
Principal
Balance

$ 3,225.00
Year 1
$ 1,069.85
$ 534.93
$ 534.92
$ 2,690.08
Year 2
$ 892.40
$ 446.20
$ 446.20
$ 2,243.88
Year 3
$ 744.38
$ 372.19
$ 372.19
$ 1,871.69
Year 4
$ 620.91
$ 310.45
$ 310.45
$ 1,561.24
Year 5
$ 517.92
$ 258.96
$ 258.96
$ 1,302.28
Year 6
$ 432.01
$ 216.01
$ 216.01
$ 1,086.27
Year 7
$ 360.36
$ 180.18
$ 180.18
$ 906.09
Year 8
$ 300.58
$ 150.29
$ 150.29
$ 755.80
Year 9
$ 250.73
$ 125.36
$ 125.36
$ 630.44
Year 10
$ 209.14
$ 104.57
$ 104.57
$ 525.87
Year 11
$ 180.00
$ 87.25
$ 92.75
$ 433.12
Year 12
$ 180.00
$ 69.11
$ 110.89
$ 322.23
Year 13
$ 180.00
$ 47.42
$ 132.58
$ 189.64
Year 14
$ 180.00
$ 21.48
$ 158.52
$ 31.12
2 months
$ 31.84
$ 0.72
$ 31.12
$ –

A good tip is to pay your bill twice a month instead of once per month. If you make a second payment or a minimum of $50 whichever is higher and apply it to principal you will pay down your debt in roughly half the time of paying just the minimum. This is an easy way to keep your balance under control and pay bills on time. It may also help to boost your credit rating in the future. By paying more often, your overall balance will stay lower, cutting interest costs. Paying twice per month may also ensure that there is more available credit for you to spend on your card each month. By paying the payment twice a month with at least a minimum of $50, you can cut your payment down to 34 months that is 2 years 10 months and your total interest $785.01. If you paid the minimum payment only you will pay $2925.11 over the 14 years. That is a difference of $2140.10. Think of all the things you can do with all the extra money! Not only did you cut the time you are paying on the debt but you saved 64% off the interest. Paying the double payment the total paid would be $4010.01; $3225.00 principal plus $785.01 interest.

Information Source: Bankrate.com

Min Pmt
Interest
principal
Balance

$ 3,225.00
Year 1
$ 1,825.39
$ 456.35
$ 1,369.04
$ 1,855.96
Year 2
$ 1,219.26
$ 255.68
$ 963.59
$ 1,855.96
10 months
$ 965.36
$ 72.99
$ 892.37
$ –

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? My first piece of advice is to only charge what they know they can pay off when the bill comes due. Try not to carry a large balance. In other words…do not charge that 70” flat panel TV for $2500 just because someone gave you a credit card with a $3,000 balance. If you cannot afford to buy that TV for cash then don’t charge it! . I would also stress the importance of making sure that they always pay at least the minimum payment on time. Paying late or even missing a payment will cause unnecessary fee and even increase the interest that they are already paying. These things can cause the debt to get to an unmanageable amount very quickly. I had this conversation with my 22 year old step daughter just last month. She wants a credit card to start getting a credit profile.

Because she is in college she has been getting lots of offers from banks with special interest rates, tote bags and other goodies just for her to apply for a credit card. I warned her that too many cards can actually hurt her credit profile. I explained to her about the debt to income ratio, which she does not have a job. She does have a trust fund that she has been using for money. She was considering this as her income. I told her that although she can pay her balance with this money it is not considered “income”. Possibly only the interest she makes off her account could be considered as income. I talked to her that having too much debt but not an equal amount of income came cause her to pay higher interest rates and/or even get turned down for other things, like a rental application or mortgage. Anybody who looks at the credit for a purchase will take total debt including student loans, car payments and credit cards and divide by income to get at the monthly ration percentage. Most places like the ratio percentage to be

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