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2.2 – Exploring Credit Card Use

Last class we learned that a ___________ interest rate is almost always what you should _________ for in a loan. Today we will talk about a financial product that appears to defy this rule: __________ ______________ A credit card is preapproved form of loan that can be used in _________ or in __________ at any time. Credit cards provide customers with a convenient way to purchase products that they don’t have enough money to buy ____________. The problem with credit cards is that they often have very _________ interest rates. Example: Mr. Glover wants to buy some new golf clubs. A new set would cost him $5000. He doesn’t have enough money saved up to buy the clubs so he will have to either take out a loan or use his credit card. He has a choice between the following two options:

A. 5% interest compounded monthly from a bank. B. 19.99% interest compounded monthly from his credit card.

a) If Mr. Glover pays $100/month how long will each option take him to pay off? b) If Mr. Glover wants to pay off the loans in 5 years’ time. What will be his monthly payment for each loan?

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As you can see, it _________ a very smart ______________ decision to use a credit card to make purchases. This gets extremely dangerous when making _________ purchases like a new vehicle Example: Parker decides to use his credit card to buy a 2019 Mustang. The car cost $60,000 and his credit card has an interest rate of 19.99% compounded monthly. He wants to pay off the car within 8 years. a) What will his monthly payments be? Compare this to an interest rate of 5%. b) How much interest will he pay over the lifetime of his loan? The question is: ________ do people choose to use credit cards to make purchases?

• It allows them to build their ___________ ___________ (although so do loans). • It is often more convenient than ____________ for a _________. • It allows them to purchase things they _________ currently ___________ (at a

significant cost). • Some transactions can only be done with credit cards • Many credit cards offer ____________ such as travel rewards or cash back to convince

customers to get their card. When choosing a credit card because of incentives, it is important to consider the entire ________ of ______________ and make sure the incentive is actually a good deal. If choosing a credit card strictly because of incentives, the safest option is to pay if off within ______ days so you don’t have to pay any ______________ (this is easier said than done).

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FoM 12

Example: MacKenna reeeeeeally wants to purchase a new computer. She finds a nice laptop for $2623.95 including taxes. She doesn’t have enough money to purchase it but decides to use credit. She has 2 options:

A. Use her new low interest credit card that has an interest rate of 14.5% compounded daily.

B. Apply for a store credit card that offers a $100 rebate off of her first purchase. This card has an interest rate of 19.3%, compounded daily.

MacKenna can afford to make monthly payments of $110 to pay off her credit card.

I. Which card do you think is a better deal?

II. Should MacKenna make smaller payments (i.e. minimum payment of 2.1% per month) and invest the rest of her money?

III. How long will it take MacKenna to pay off either option? IV. What is the total cost of each option? How much interest will she be paying for each

option?

Assignment: TEXTBOOK P. 100 # 1-4

Option A

No unless she can make more than 20 interest

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