Question

You just rented your first apartment and need to buy a TV, a desk, and a TV. You decide to use a credit card with a $2,000 credit limit, a 2% minimum payment, and a 19.9% APR. How much would you need to spend on your three items? Once you complete the payment process with the first credit card, you will then complete it a second time with a different credit card. If you only make the minimum payments and avoid any additional purchases, what will the remaining balance be at the end of the year? How much would you have paid over the year using the first credit card? How much would you still have left to pay? What percent of the original balance would not have been paid? How much would you have paid over the year using the second credit card? How much would you still have left to pay? What percent of the original balance would not have been paid? Compare the advantages and disadvantages of each card. Which credit card is the better option if you only care about how much you have already paid? Which card is the better option if you only care about the remaining balance? Given what you have discovered from these two credit cards, what kind of effects do the minimum payment percentage and APR play on the amount of time it takes to pay off a credit card?

Answer 1

When purchasing items with a credit card that has a 2% minimum payment and a 19.9% APR, the total amount paid over time will exceed the original balance due to interest. Paying more than the minimum payment can help reduce the principal faster and save on interest. The APR and minimum payment requirement critically influence the time taken to pay off the balance and the total cost of the debt.

Step-by-step explanation:

Understanding Credit Card Payments and Debt Management

When you rent your first apartment and need to purchase items such as a TV and a desk, it is tempting to use a credit card for the convenience of deferred payments. Supposing you use a credit card with a $2,000 credit limit, a 2% minimum payment, and a 19.9% APR, it is crucial to understand how this can affect your finances over time.

If you decide to make only the minimum payments, you will be charged interest on the remaining balance each month. With the given APR, if you spent the entire $2,000 credit limit, your minimum monthly payment would start at $40 (2% of $2,000), but this amount would decrease over time as you pay down the principal unless there is a fixed minimum payment amount set by the credit card company.

Throughout the year, as interest accumulates, the total amount you pay would be significantly higher than the original balance due to interest charges. If your friend pays an additional $10 each month on their credit card debt, they will be in a better position than you by reducing their principal balance faster and incurring less interest over time.

To illustrate with a different example, the monthly payments on a credit card debt of $5,000 with a 24.99% APR, when paid off over 3 years, would be calculated by a loan amortization formula considering the interest. Similarly, monthly payments on house loans, such as a $300,000 loan at a 2% interest rate or a $270,000 loan at a 3% interest rate over 30 years, also depend on the terms and the interest rate.

Understanding these principles is key when considering the effects of minimum payment percentages and APR on the time it takes to pay off a credit card. The lower the minimum payment and the higher the APR, the longer it will take to pay off the balance and the more interest you will pay in the long run. Credit cards with reward systems, such as offering a mile for every dollar charged, can be appealing, but should not distract from the importance of managing credit card debt wisely.

APR and minimum payment dynamics will dictate the total cost of the debt and the time required to be debt-free. When comparing credit cards, consider which card gives you the best advantage, whether in terms of total payments made or remaining balance, based on your financial priorities and behavior with credit.