| | | | | | | | Analysis of Credit Card Debt |
| | | | | | | | Marie James |
| | | | | | | | 12/27/14 |
| | 1) | Most credit cards require that you pay a minimum monthly payment of two | | | | | | | wo 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) |
| | | The use of credit cards is a popular means of making payments in the daily activities of individuals. These cards, recognize a person, and serve as a means of identification for the |
| | | one entitled to use it in making purchases, where the entire amount spent is billed on a charge account. Most credit cards have terms and conditions as specified by the credit card entity |
| | | that gives guidelines on how the card usage is implemented among customers. (Hawtrey, 2002) These include interest rates, monthly payments and the annual percentage rate. |
| | | Considering a balance of $5,270 on the credit card and a minimum monthly payment of two percent of the balance, these provisions would clearly help in determining the |
| | | minimum payment a credit card holder is required to pay per month. Multiplying two percent with $5,270 gives a minimum payment of $105.40. This amount reflects the minimum |
| | | monthly payment, assuming that no other fees are being charged on the credit card per month. |
| | | | | BALANCE |
| | | | | $5,270 |
| | | | | | | MINIMUM MONTHLY PAYMENT RATE | | | | | MINIMUM MONTHLY AMOUNT |
| | | | | | | | | 2% | | | | 0.02 |
| | 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. |
| | | Credit card entities charge a certain amount of interest to their customers, the credit card holders. This interest is the sum of money paid over a given period of time, calculated based |
| | | on a specific percentage rate set up, either annually or monthly, depending on the policy of the organization. In this case, the interest rate charged is calculated using an annual |
| | | percentage rate of 15.53%. This interest rate is charged on the credit card balance yearly. A credit balance of $5,270.00 is multiplied with the annual percentage rate of 15.53%. The |
| | | figure acquired after applying the above interest is $818.43, which is the annual interest charged on the credit card. | | | BALANCE |
| | | | | | $5,270 |
| | | | | | | | ANNUAL INTEREST RATE | | | ANNUAL INTEREST |
| | | | | | | | | 15.53% | | 0.1553 |
| | | This means an amount of $68.20 is charged as interest on the card per month. This figure is arrived at by dividing the annual interest charge by twelve, which are the number |
| | | of months making up a year to get the actual amount per month. Having these figures, it is easier to determine the total amount that was applied to reduce the principal. This amount is |
| | | calculated by adding the minimum monthly charge and the interest charged per month that is by adding $105.40 to $68.20 to get $173.60. This is the total amount applied to reduce the |
| | | principal.as it is automatically deducted monthly from the credit card. | | | ANNUAL INTEREST |
| | | | | | $818.43 |
| | | | | | | | | MONTHLY INTEREST |
| | | | | | | | | $68.20 |
| | 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. |
| | | Various credit cards have different rates of determining their various charges. If a credit card has a balance of $3000, the minimum monthly payment is determined by the percentages developed |
| | | by the provider. For instance, if the minimum monthly payment is set at 3.5% of the balance, the cardholder will be required to pay a minimum monthly charge equal to $105. This amount, being |
| | | arrived at by multiplying the set percentage with the card balance. Depending on the policies of the financial institution, the fraction of the minimum amount that go towards the interest and the |
| | | fraction of minimum amount that goes towards the principal could be customer friendly, depending on whether the percentages set are high or low(Matias,2001). In this case, if 4% of the |
| | | minimum charge is set aside to go towards the interest, this amount will be $4.2, that is four percent of $105. If the percentage of minimum monthly charges to go towards the principal is |
| | | 8%, the actual amount will be eight percent of $105 giving $8.4. These calculated amounts will be deducted from the minimum charge to be allocated to the interest and principal respectively. | | BALANCE |
| | | | | $3,000 |
| | | | | | | PERCENTAGE RATE | | | MINIMUM MONTHLY CHARGE |
| | | | | | | 3.50% | | | | 0.035 |
| | | | | MINIMUM CHARGE |
| | | | | $105 | | | PERCENTAGE RATE | | | | PERCENTAGE RATE |
| | | | | | | | TO BE ALLOCATED TO INTEREST | | | | TO BE ALLOCATED TO PRINCIPAL |
| | | | | | | | | 4% | | | | 8% |
| | | | | | | | | 0.04 | | | | 0.0032 |
| | 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? |
| | | Basing consideration on one of the credit cards, the Citi double cash credit card, the rates and terms used to calculate charges determine the minimum monthly payments, |
| | | how much of the minimum payment goes towards interest and how much goes towards the principal amount. For the Citi double cash credit card rates, having a balance of |
| | | $2000 on the card, there is a 0% introduction annual percentage rate on balance transfers and all purchases made for twelve months on the period of acquisition of the card. After |
| | | which, this special charge has a variable annual percentage rate which will be considered as 12.99% to 22.99% depending on the creditworthiness of the cardholder which is |
| | | critically assessed by the service provider. The diagram below shows the clear illustration of the Citi double cash credit card. |
| | | Another charge imposed on the card is a balance transfer fee of either $5 or three percent of the amount of either transfer, the greater one being affected and the one of |
| | | lesser value dropped. By using the card in making purchases, the card earns the cardholder a cash back, twice on each and every purchase. Cash back refers to a certain |
| | | amount offered, also known as a discount, in return for an immediate payment of various goods and services. No annual fee is charged on the card (Robert, 2003). |
| | 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 athttp://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. |
| | | Credit card debts are paid either monthly or annually, depending on the agreement of the customer with the concerned finance institution. An example taken by using one of the credit |
| | | cards reveals that: when only minimum monthly payments are made by the card holder, assuming a credit card balance of $1000, the interest rate on the credit card will be charged at a |
| | | percentage rate of 18% of the balance. The minimum payment being calculated using 3% and a fixed payment of 3% per month. This would mean that it will take ninety three months for the |
| | | card holder to completely get rid of the debt owing by paying a total interest of $698.38. This amount clearly reduces the principal on the card by the deductions made on it after its application. |
| | 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? |
| | | A debt refers to a certain amount of money, or equipment that the debtor has an obligation to pay or submit to another. Credit card debt leaves the card holder with a responsibility to pay |
| | | off the debt as soon as possible to enable him to continue using the card effectively. Young adults, have recently shown great interest in their desire to acquire credit cards. However, not all |
| | | credit cards are suitable for use by young adults, most of who may still be in college and not having a strong and reliable source of income at hand. Concerning the use of credit cards, this |
| | | group of people should be guided and advised on the appropriate type to use and further do research to identify which categories suits them perfectly. There are three categories of credit |
| | | cards used by finance companies. These include the secured cards, prepaid cards and the unsecured cards. |
| | | Secured credit cards require the cardholder to first deposit a certain amount of money into a bank account in order to obtain a credit line. Each month a bill is sent to the card holder |
| | | showing the charges and all transactions effected using the card. In case the card holder wants to upgrade to using an unsecured card or he prepaid card, the amount of money deposited in the |
| | | secured card is refundable. The advantages of using secured credit cards are: the process of applying to acquire the card is fast and easy, low fixed rates and the provision of collateral is not |
| | | mandatory. Prepaid cards bind the user to deposit a particular amount in order to activate the card and use it. All the transactions and purchases made using this card are deducted from the |
| | | deposit initially made. When the balance in the card is completely exploited, the cardholder needs to reload the card in order to continue using it. This is the best option for young adults as |
| | | they will not have the desire to buy anything in impulse, since they have to ensure there is some amount of money in the card in order to make purchases, saving them from the burden of debts. |
| | | Unsecured cards do not necessarily require the cardholder to submit a deposit in order to acquire a credit line. These cards are quick and easy to apply, and give loans to customers for |
| | | any reasons. Unsecured cards are not advisable for use by young adults, since they strictly need to keep their rate of spending within their available resources. Therefore, my advice to young |
| | | adults on their intention of getting to use credit cards at an early age would be to ensure that they get the correct information first, on the rates charged and gauge themselves with the incomes |
| | | they have in order to stay away from large debts. This is the reason as to why the government has enacted laws to make it harder for young adults, especially below the age of twenty one to |
| | | qualify for credit cards without showing their real income. |
| | | | | | | | | References |
| | | | | | | 1) http://www.federalreserve.gov/creditcard/manage.html |
| | | | | | | 2) http://www.bankrate.com/finance/credit-cards/what-debt-to-pay-off-first.aspx |
| | | | | | | 3) http:// www.quickanddirtytips.com/money-finance/credit/how-pay-credit-card-debt?page=all |
| | | | | | | 4) Louis, P. & Matias, V. (2001). Credit, interest rates and the open economy. London: Edinburgh publishers. |
| | | | | | | 5) Robert, V. (2003). Interest rates and the central bank, in money, trade and economic growth. New York: Psychology press publishers. |
| | | | | | | 6) Hawtrey, R.G. (2002). A century of bank rate. London: psychology press publishers. |
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