Gov/Econ- Vinson

Unit Five

Understanding Credit

Answer the following questions after reading the Credit Cards 101 document:

1. The benefits to having a credit card are pretty obvious. In your opinion, what is the most significant danger of using
credit, and why?

The most significant danger of using credit is that if a person falls behind on paying off their credit it will disrupt
that person's credit score. This would cause that person to have a more difficult time getting a loan in the future,
which creates a cycle of being in debt and then not being able to pay off their credit in time.

2. What are the two basic requirements for obtaining a credit card?

You must be 18 years old You must have some kind of income

3. Unfortunately, credit isn’t free money. The bank providing you with credit makes a profit from loaning you money.
What are the three (3) ways that banks/credit card companies make money from extending credit to you?

Annual Fee - a membership fee for having a credit card account

Annual Percentage Rate (APR) - Interest rate on purchases if not paid off in time

Finance Charge - amount a person uses to pay off their credit card, which includes interest and other charges on
transactions

4. Once you begin to use credit, three credit reporting institutions will give you a credit rating (known as a FICO score)
between 300 and 850 (more info here). What are some things that determine one’s credit score? List three (3):

Payment history - track record of making payments on credit cards and loans

Credit Utilization - how much of the available credit on revolving credit lines is being used

Length of Credit History - the amount of time credit cards have been open and how recently they've been used

5. What are some potential problems associated with having a poor/low credit rating?

Some problems associated with having a poor/low credit rating is that if a person has poor/bad credit ratings they
will have to pay higher interest rates. They would have to make larger down payments or additional fees. Having a
low credit score could also impact a person's ability to rent out a place to live because some landlords will check a
person's credit.

6. For the remainder of the assignment, let’s imagine that you recently turned 18 and got a credit card through your bank
or credit union. Your card has a $1000 credit limit and you pay an APR of 18% (if you divide by 12, that means you pay
1.5% interest on your balance each month). In January you decide to treat yourself to a little late
ChristmaHanuKwanzikkah present and you buy yourself a nice new TV for the apartment you’re moving into:

Samsung - 65" Class Q60T Series QLED 4K UHD Smart Tizen TV

 Your price for this item is $949.99 (We’ll assume tax is included)
Save $

We’re going to see how long it takes to pay for this TV if you make payments of $100 per month, and also see how much
interest you will pay over that time. Fill in all of the blanks on the following chart, rounding up to the nearest whole cent
(if you need some guidance, click HERE to check out a quick Screencastify):

Month Previous Interest Charge Balance plus Your payment Remaining

Balance (x .015) Interest Balance

Jan 0 0 0 0 $949.99

Feb $949.99 $14.25 $964.24 $100 $864.24

Mar $864.24 $12.96 $877.20 $100 $777.20

Apr $777.20 $11.66 $788.86 $100 $688.86

May $688.86 $10.33 $699.19 $100 $599.19

Jun $599.19 $8.98 $608.18 $100 $508.18

Jul $508.18 $7.62 $515.80 $100 $415.80

Aug $415.80 $6.24 $422.03 $100 $322.03

Sep $322.03 $4.83 $326.86 $100 $226.86

Oct $226.86 $3.40 $230.27 $100 $130.27

Nov $130.27 $1.95 $132.22 $100 $32.22

Dec $32.22 $0.48 $32.70 $32.70 $0.00

7. The chart above assumes that you don’t put any other charges on this card throughout the year. How much longer do
you think it would take to pay off your balance if you put another $500 or so on the card during that time?

If I were to put another $500 or so on the card during that time it would probably take around 6 months more in
order to pay off my balance.

8. Add up everything in the “Interest Charge” column. How much interest did you pay? So how much did you actually
pay for the TV?

Total interest: $82.70 Total cost of TV + interest: $1,032.69