Beth has a no-annual-fee Visa credit card that charges an APR of 12.5% per year. Interest is compounded monthly. If a payment is missed by even 1 day, the rate jumps to an APR of 24.5% for the remainder of the time she keeps the card or until the total debt is paid off. (This is not an uncommon practice for many banks that issue credit cards when you read the fine print.) The current balance is $2000 and there is a minimum payment of $20.83 per month at the 12.5% rate. Beth decided “enough already”; she decided to stop using the card immediately and pay the balance off as soon as her budget allowed. She realizes that if she misses a payment due date, the minimum will increase to $40.83 per month until the total balance is paid at this higher APR. a. Verify the monthly minimums for both nominal (APR) rates for a balance of $2000. b. If she pays well over the minimum at $40 per month on time, how many months and years will it take to become debt-free of this card? Use an equation and a spreadsheet function to determine the answers. c. If Beth misses the due date on the first payment of $40 and now increases the monthly amount to $41, determine the months and years to be free of the debt. d. After seeing the time required at $41 per month, she increases the payments to $50 and stays on time every month. Now determine the months and years to be free of this credit card debt.
(USE SPREADSHEET FUNCTION)
Beth has a no-annual-fee Visa credit card that charges an APR of 12.5% per year.
Interest is compounded monthly. If a payment is missed by even 1 day, the rate
jumps to an APR of 24.5% for the remainder of the time she keeps the card or until
the total debt is paid off. (This is not an uncommon practice for many banks that
issue credit cards when you read the fine print.) The current balance is $2000 and
there is a minimum payment of $20.83 per month at the 12.5% rate. Beth decided
“enough already”; she decided to stop using the card immediately and pay the
balance off as soon as her budget allowed. She realizes that if she misses a payment
due date, the minimum will increase to $40.83 per month until the total balance is
paid at this higher APR.
a. Verify the monthly minimums for both nominal (APR) rates for a balance of
$2000.
b. If she pays well over the minimum at $40 per month on time, how many months
and years will it take to become debt-free of this card? Use an equation and a
spreadsheet function to determine the answers.
c. If Beth misses the due date on the first payment of $40 and now increases the
monthly amount to $41, determine the months and years to be free of the debt.
d. After seeing the time required at $41 per month, she increases the payments to
$50 and stays on time every month. Now determine the months and years to be
free of this credit card debt.
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