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?

In my opinion the most significant danger of using a credit card is that you buy things you would normally not have
the money for, but with the credit card you have the ‘money’ to buy more expensive things. This leads you to have to
pay it off later but if you didn’t have the money to buy those expensive things in the first place how will you pay off
the credit card?

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

You have to be 18 years old You have to have some form 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- This is a membership fee

Annual Percentage Rate (APR)- This is the interest rates

Finance Charge- This includes 3 Methods 1:Average daily balance 2:Adjusted balance 3:Previous balance

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- Accounts for 35% of FICO

Credit utilization- Accounts for 30% of FICO

Length of credit history- Accounts for 15% of FICO

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

If you have a poor/low credit rating then you will be less likely to take out a loan if needed one. With a poor/low
credit rating it also makes your interest rates go up.

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 $8.99 $608.18 $100 $508.18

Jul $508.18 $7.62 $515.80 $100 $415.80

Aug $415.80 $6.24 $422.04 $100 $322.04

Sep $322.04 $4.83 $326.87 $100 $226.87

Oct $226.87 $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?

With the TV being $949.99 but with interest it becomes $1,032.70. This already takes a whole year to pay off. Then
with adding $500 to the same credit card it would take an additional 6 month at the least, to pay off the whole
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: $82.71 Total cost of TV + interest: $1,032.70