Getting Out of Debt

Anita just graduated from college, got a job and decided to buy new furniture for her new apartment. She purchased the
furniture with her credit card. She previously did not have any balance on her card and after buying the furniture the
balance came to $5,000. The interest rate (APR) on her credit card is 18%. She wants to make a budget based on her new
salary and she needs to figure out a monthly payment so that she can pay her credit card bill in reasonable amount of time.
She doesn’t want to pay too much each month on the card though because she has other bills and she wants to have some
money left over each month to have some fun.Anita knows that you like to work on challenging math problems so she comes
to you for help. Your job is to analyze this situation and, in the end, come up with some good advice for Anita.

Problem 1
Investigate what happens if Anita decides to make a payment of $100 each month. To do this, you need to understand the
process by which credit card companies apply interest to the balances of their potential victims. Here is how it works: The
$5,000 balance that Anita starts with is called the principle. The bank applies its interest rate at the end of each month,
before the next payment is made. For example, if she has a balance of $5,000 and, since there are 12 months in a year, the
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balance is multiplied by m =1+ and then her payment of $100 is applied. Use the following table to find out how
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many months it will take Anita to get her balance to be less than $4,500:

Month Balance at the beginning of the month Balance at the end of the month
1€ $5,000 $5000m - $100 = $4,975.00
2 $4,975.00
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Now calculate the amount of money that Anita paid in order to get her balance to that amount.

Problem 2
You probably realized from the last problem that it will take a long time to come up with a good analysis for Anita if we keep
using tables. It will help us if we can come up with a balance function. In other words, a function where the input is the
number of the month that the payment is made and the output is the balance owed at the end of that month. See if the
following pattern helps:
f (0) = 5000
f (1) = 5000m − 100
f (2) = (5000m − 100)m − 100 = 5000m 2 − 100m − 100
a) Write f (3) and f (4) using the same pattern.
b) By now you should see a pattern emerging in your formula, a geometric series. A geometric series has the form:
a(r n +1 −1)
€ a + ar + ar 2 + ar 3 + ... + ar n = .
r −1
c) Now write the general formula for f(n) using the above formula for a geometric series.
d) Rewrite the formula using y instead of f(n) and using x instead of n.
e) What do the x and y-values represent in your formula?
€ f) Based on your answer to the previous question what would be the best values to set up the viewing window in your
graphing calculator:
Xmin =
Xmax =
Xscl =
Ymin =
Ymax =
Yscl =
g) Test your answer to part f by graphing your model. Make sure that you can see both the x and y – intercepts in your graph.
You may need to revise your answer to part f several times until you have a really nice graph that shows all the information
you are looking for (for example, the Xscl and Yscl may be different).

Problem 3
Already you have seen that there is a huge amount of mathematics involved in the way credit cards work. We still have a
long way to go, however, before we can really offer any expert advice to Anita.
a) Sketch a large graph of the model you found in the previous problem on graph paper. Make sure that you label your axes
well and write on your graph the meaning of both the x and y-axes so that anyone reading the graph can tell what the

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 graph is saying. Since this graph is a curve and not linear, you should plot several points accurately and then connect
them carefully. You can do this by using either the trace function on your calculator or the table function.
b) Use the graph to estimate the number of months it will take Anita to completely pay off the balance on her credit card.
c) Based on your answer to part b, calculate the total amount of interest she had to pay in order to do this.
d) Examining the formula you came up with in problem 2, what do you think would change in the formula if the payment
were $200 per month? $300?
e) Graph each of these new functions on your calculator and add neatly add them to your graph from part a (you should
have one large graph with 3 different functions). Label each graph with its equation and use a different color for each
one.
f) You have just finished all of this work when you have your first meeting with Anita to give her advice. Make sure you
explain why it is so important to choose one plan over another.

Problem 4
Now for the dark side of mathematics. Anita is doing exactly what the corporate executives at her credit card company want
her to do. Please help her! You should use the work that you did in problem 1 for these questions. Be careful, they might
sound tricky but there is a simple way to answer them.
a) Anita sets up a new meeting with you 10 months later. She tells you that she took your advice to heart and that over the
past ten months she has been making a payment each month of $200. “The problem”, she tells you, “is that I just don’t
seem to be making much progress.” It turns out that Anita has been having a little bit of fun and she has been using her
card from time to time to go out to dinner and the movies. She tells you that she has been spending about $150 each
month using her card. She knows that it is not god but she asks you, “shouldn’t my debt still be disappearing, even if it is
at a slower rate?” Find out her balance at the end of the 10 months.
b) Calculate the amount of interest she has paid over the past 10 months.
c) Calculate the total amount of interest she will pay if she continues this way for the next two years.

Problem 5
Anita is extremely troubled by the debt she is still getting into. She has decided that she needs to take serious action. She
tells you that she wants to rearrange things in her life so that she can pay off all her debt in 18 months. She asks you to tell
her the minimum payment she needs to make each month in order to do this. Solve this problem for her and calculate the
total amount of interest she will have paid from the day she bought the furniture to the day the debt is finally paid off.

Part Description Points Points

possible earned
Table complete with answers rounded to two decimal points.
1 30
Show all work for the answer to the question after the table with your answer correct to two
decimal points.

2 Neatly show all work involved in developing the formula. Do not leave out any steps. 30

Your graph with the three functions on large graph paper (8.5” x 11”). Each graph should be
3 a different color and it should be clear what the equation is for each graph. 30

Answers to parts “b – d” and “f”, written in complete sentences.

4 Clearly show all work in calculating your answers. 30

5 Use complete sentences, equations or graphs to completely justify your answer. 30

Communication: I will grade each group’s ability to communicate with each other and with
6 me. I will do this by observing your mathematical conversations within your groups and by 50
asking members of your group specific questions about the project.
Honors students: Find an advertisement for a credit card offer. Summarize the offer (A.P.R.,
7 transfer offers, fine print, etc.). Analyze possible rip-offs. Why are they rip-offs? Explain 50
using complete sentences and as much math as you can think of.

Total 200/250