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You Do the Math Answers1. How long will it take to pay off a $1,000 credit card balance that carries an annual 18 percent interestrate if you make no additional purchases and make the minimum monthly payment (typically $10)?Go online and find a credit card interest calculator. Use the calculator to illustrate the benefits ofpaying more than the minimum due on a credit card. Enter the following numbers into the calculator:? Amount charged: $1,000? Annual interest rate: 18 percent? Minimum payment percent: 4 percent? Leave minimum payment blank Compute the results. How much time and money can you save by paying more than the required4 percent each month? It will take more than 50 years to pay off the credit card balance. Money saved = $402 (600 – 198); time saved = 48 years (50 – 2)2. Fiona’s credit card balance is $5,000. The APR is 18 percent and the minimum payment is 5 percentof the balance. What is the minimum payment due? How much of the minimum payment goes tointerest? How much of the payment goes to the principal? If Fiona makes the minimum paymentthis month and does not use her card to make any more purchases, what will her balance be nextmonth? What is next month’s minimum payment due? Monthly interest rate = 1.5% (18% ÷ 12);minimum payment due = $250 ($5,000 × 5%); interest paid = $75 ($5,000 × 1.5%);principal paid = $175 ($250 – 75); next month’s balance = $4,825 ($5,000 – 175);next month’s minimum payment due = $241.25($4,825 × 5%)Review Your Knowledge Answers 1.How does a credit transaction differ from a cash transaction?In a cash transaction, you exchange money for goods or services. Credit is a medium ofexchange that allows individuals to buy goods or services now and pay for them later. 2.Explain the difference between closed-end and open-end credit.Closed-end credit is a loan for a specific amount that must be repaid with finance chargesby a specified date. Open-end credit is an agreement that allows the borrower to use aspecific amount of money for an indefinite period of time. 3.What steps can you take to build a sound financial reputation?To build a sound financial reputation, you can get a job, open a savings account and achecking account, and apply for a credit card. 4.What is the function of a credit reporting agency?A credit reporting agency collects information about the financial and credit transactions ofconsumers. 5.What factors influence a person’s credit score?Factors that influence a person’s credit score are payment history, amounts owed, credithistory, new credit, and types of credit used. 6.What is wage garnishment?Garnishment is a legal procedure requiring a portion of the debtor’s pay to be set aside bythe person’s employer to pay creditors. 7.Explain the difference between variable interest rates and fixed interest rates.Variable interest rates fluctuate; fixed rates stay the same. 8.What are subprime credit cards?Subprime credit cards are credit agreements offered to people who have a poor credithistory. The cards have high interest rates, many fees, and low credit limits. 9.What is the main purpose of the Fair Credit Billing Act?The Fair Credit Billing Act protects consumers against unfair billing practices. It outlinesthe procedures to follow in resolving billing errors or disputes. 10.What is phishing and how is it typically performed?Phishing is a crime committed online with e-mails that seek your personal information. Thephisher claims to be a business where you may have an account and uses a fake websitecreated to collect your information. The message will ask you to confirm or update yourpersonal information or financial data. If you provide the information, the phisher uses it tosell your identity or to run up bills and commit other crimes in your name. ................
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