Interest Rates – 1 PAGE ONLY-

Interest rates are a fact of life that you will encounter both professionally and personally. One area of interest rates that you may be most concerned about are those applied to credit card debt. Let’s say that you had $2400 on a particular credit card that charges an annual percentage rate (APR) of 21% and requires that you pay a minimum of 2% per month. Could you determine the minimum monthly payment? The minimum monthly payment would simply be 2% times the balance as shown:

2% x $2400.00 = 0.02 x $2400.00 = $48.00

So, your monthly minimum payment would be $48.00. Do you know how much of this is being applied to the principal and how much is going to interest? To determine this, you would need to know the simple interest formula.

I = Prt

In this formula, I = interest, P = is the principal (balance), r = is the annual percentage rate, and t is the time frame. To determine the interest per month on a balance of $2400 with an APR of 21%, you would let P = $2400, r = .21, and t = 1/12 (1 month is 1/12 of a year). The interest paid each month would then be:

I = Prt = ($2400)(.21)(1/12) = $42.00

So, you are paying $42.00 per month towards interest. With a minimum payment of $48.00, that means you are paying $6.00 per month towards the balance ($48.00 – $42.00 = $6.00). No wonder it takes so long to pay off a credit card!

Research interest rates and consumer debt using the Argosy University online library resources and the Internet.

Based on the articles and your independent research, respond to the following:

How is consumer debt different today than in the past?

What role do interest rates play in mounting consumer debt?

What are the typical interest rates applied to credit cards, mortgages, and other debt?

Many of today’s interest rates are variable rather than fixed. What difference does this make to pension plans, housing loans, and other personal finances?

Write your response in 1–2 paragraphs (a total of 200-300 words).

Comment on your peers’ responses, addressing the following:

Have the issue of consumer debt and the role of interest rates been explored?

Does the response clearly explain the causal relationship between fixed interest rates and pension plans, housing loans, and other personal finances?

Are statements supported by reason and research?

LASA 1: Analysis of Credit Card Debt -3PAGES-

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. This report must be submitted as a Word document and attachment to the Submissions Area. Consider the following questions and prepare a report based upon your conclusions. Your report should be created as a Word document, but you are encouraged to create graphs and charts (which can be made in Excel and copied to the Word document) to illustrate your points. Remember: make sure you explain what the charts and/or graphs mean; do not assume the reader understands what they mean.

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)?

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.

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.

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?

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.

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?