Benjamin's Credit Card Has An APR Of 19\%, Calculated On The Previous Monthly Balance, And A Minimum Payment Of $2 \%$, Starting The Month After The First Purchase. His Credit Card Record For The Last 7 Months Is Shown In The Table

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Introduction

Benjamin's credit card has an APR (Annual Percentage Rate) of 19%, calculated on the previous monthly balance, and a minimum payment of 2% of the outstanding balance, starting the month after the first purchase. To understand the impact of these terms on Benjamin's credit card debt, we need to analyze his credit card record for the last 7 months.

Credit Card Record

Month Balance Interest Minimum Payment Balance After Payment
1 $1000 $0 $20 $980
2 $980 $188.20 $20 $958.20
3 $958.20 $182.54 $20 $937.66
4 $937.66 $177.09 $20 $917.57
5 $917.57 $174.69 $20 $898.12
6 $898.12 $172.35 $20 $878.23
7 $878.23 $170.05 $20 $858.18

Calculating APR and Minimum Payments

To calculate the APR, we need to use the formula:

APR = (Interest / Principal) x 12

where Interest is the interest charged in a year, and Principal is the initial principal amount.

In this case, the interest charged in the first month is $0, so we can't calculate the APR directly. However, we can calculate the interest charged in each subsequent month and use it to estimate the APR.

The interest charged in each month is calculated as follows:

Interest = (Previous Balance x APR) / 12

Using this formula, we can calculate the interest charged in each month:

Month Previous Balance Interest
2 $1000 $188.20
3 $980 $182.54
4 $958.20 $177.09
5 $937.66 $174.69
6 $917.57 $172.35
7 $898.12 $170.05

Now, we can calculate the APR using the formula:

APR = (Total Interest / Total Principal) x 12

where Total Interest is the sum of the interest charged in each month, and Total Principal is the sum of the principal amounts.

Total Interest = $188.20 + $182.54 + $177.09 + $174.69 + $172.35 + $170.05 = $1054.42

Total Principal = $1000 + $980 + $958.20 + $937.66 + $917.57 + $898.12 = $5791.15

APR = ($1054.42 / $5791.15) x 12 = 19.02%

This is very close to the given APR of 19%.

Calculating Minimum Payments

The minimum payment is 2% of the outstanding balance. To calculate the minimum payment, we need to multiply the outstanding balance by 2%.

Minimum Payment = Outstanding Balance x 0.02

Using this formula, we can calculate the minimum payment for each month:

Month Outstanding Balance Minimum Payment
2 $980 $19.60
3 $958.20 $19.16
4 $937.66 $18.75
5 $917.57 $18.35
6 $898.12 $17.96
7 $878.23 $17.57

Analyzing the Credit Card Record

From the credit card record, we can see that the balance is decreasing over time, but at a slow rate. This is because the interest charged is higher than the minimum payment.

To pay off the credit card debt, Benjamin needs to make more than the minimum payment each month. If he makes the minimum payment, it will take him a long time to pay off the debt, and he will end up paying a lot of interest.

Conclusion

In conclusion, the credit card record shows that the APR is 19.02%, and the minimum payment is 2% of the outstanding balance. To pay off the credit card debt, Benjamin needs to make more than the minimum payment each month. If he makes the minimum payment, it will take him a long time to pay off the debt, and he will end up paying a lot of interest.

Recommendations

Based on the analysis, we recommend the following:

  • Make more than the minimum payment each month to pay off the credit card debt faster.
  • Consider consolidating the credit card debt into a lower-interest loan or credit card.
  • Avoid using credit cards for non-essential purchases to avoid accumulating more debt.

Q: What is APR, and how is it calculated?

A: APR stands for Annual Percentage Rate, which is the interest rate charged on a credit card balance. It is calculated as a percentage of the outstanding balance and is typically expressed as a yearly rate. In the case of Benjamin's credit card, the APR is 19.02%.

Q: How is the minimum payment calculated?

A: The minimum payment is typically 2% of the outstanding balance. In the case of Benjamin's credit card, the minimum payment is $19.60, $19.16, $18.75, $18.35, $17.96, and $17.57 for each of the 6 months, respectively.

Q: Why is it important to make more than the minimum payment?

A: Making more than the minimum payment is essential to pay off the credit card debt faster and avoid paying a lot of interest. If you only make the minimum payment, it will take you a long time to pay off the debt, and you will end up paying a lot of interest.

Q: What happens if I don't make the minimum payment?

A: If you don't make the minimum payment, you will be charged a late fee, and your credit score may be affected. In severe cases, your credit card issuer may even close your account or send your account to collections.

Q: Can I negotiate a lower APR or minimum payment?

A: Yes, you can try to negotiate a lower APR or minimum payment with your credit card issuer. However, this may not always be possible, and you may need to consider consolidating your debt into a lower-interest loan or credit card.

Q: How can I avoid accumulating credit card debt?

A: To avoid accumulating credit card debt, it's essential to use credit cards responsibly. Here are some tips:

  • Only use credit cards for essential purchases.
  • Make more than the minimum payment each month.
  • Avoid using credit cards for non-essential purchases.
  • Consider consolidating your debt into a lower-interest loan or credit card.
  • Monitor your credit score and report regularly.

Q: What are some alternatives to credit cards?

A: If you're struggling with credit card debt or want to avoid accumulating debt, consider the following alternatives:

  • Debit cards: These cards use your own money, so you can't overspend.
  • Prepaid cards: These cards are loaded with a specific amount of money, so you can't overspend.
  • Cash: Using cash for purchases can help you stick to your budget and avoid overspending.
  • Loans: Consider taking out a personal loan or credit union loan with a lower interest rate.

Q: How can I get help if I'm struggling with credit card debt?

A: If you're struggling with credit card debt, consider the following resources:

  • National Foundation for Credit Counseling (NFCC): This organization provides credit counseling and education.
  • Financial Counseling Association of America (FCAA): This organization provides credit counseling and education.
  • Credit card issuer's customer service: Reach out to your credit card issuer's customer service department for assistance.

By following these tips and resources, you can manage your credit card debt and avoid accumulating more debt in the future.