Name: Period # R/W:
The Credit Use Cycle Personal Finance
Let’s assume we have a credit card with the following terms:
Intro APR: None Regular APR: 12% Penalty APR: 24%
Applied if failure to make minimum
payment by due date
Over the limit fee: $35 Late Payment Fee: $35
1. Let’s say that you apply for and receive a card on January 1. Because this is your first card,
the bank sets the credit limit at $1,000. You make $500 of purchases during January. In early
February, you receive a statement showing that you owe $500. Let’s construct it on the next
page. But, you have the option of paying another amount of 2% of the amount you owe. In dollar
terms, what will be the minimum payment required?
__________10________________________
2. Your payment is due by February 21, a nice 21 days from the date the January bill was
generated. What do they call the time between when they send the bill out and when the bill is
due? _______________________grace period______________________________
3. Sending in the minimum payment is a lot easier to do than paying the whole bill, so you pay
just the minimum. How much will you still owe on your January purchases?
_______490_________
4. When you get the next bill, you know there’s going to be some interest charged to you. How
do you go about computing it? _________________12%/12=1%____________________
5. Now that you know how to do it, compute the interest you’re going to see on the next bill:
_____________________4.9_____________________________________________
6. During February, while you were thinking about whether to pay your whole January bill or just
the minimum payment, you made $600 in new purchases on your card! To see how much you
owe when February’s bill arrives, let’s construct that bill on the next page. How much do you
owe? ________________1094.9_____________________________
7. Let’s say that you put February’s bill aside and lost track of it for a few weeks. The bill was
due by March 21, but you only discover it on March 23. You immediately send in the minimum
payment in the amount of: ________1129.9_____________________________
8. You realized that things were getting out of hand (and that you have exceeded your card’s
credit limit) so at the beginning of March you put your card in the drawer and didn’t purchase
anything with it! Of course, you still owe the credit card company. Let’s construct the March bill
and see how much you owe now: ________________1138.37_______________________
9. Describe one thing you have learned about credit and credit cards as a result of completing
this activity: ____________I learned how important it is not to go over your credit limit because
the over limit fee is so high and can add up easily; in this example it is 35 dollars, which is very
expensive. _______________________________________
Monthly Credit Card Bills
Your Name January Credit Card Bill (received in early February )
Prior Balance $ 0.00
Interest on prior balance $ 0.00
Purchases in January $ 500.00
Over the limit fee $ 0.00
Late Payment fee $ 0.00
Total Due $ 500.00
Minimum Payment (2%) $ 10.00
You pay: $__________________ before the February 21 due date.
Your Name February Credit Card Bill (received in early March)
Prior Balance $ 490.00
Interest on prior balance $ 4.90
Purchases in February $ 600.00
Over the limit fee $ 35.00
Late Payment fee $ 0.00
Total Due $ 1,129.90
Minimum Payment (2%) $ 22.60
You pay: $______$22.60____________ on March 23, two days after the March 21 due date.
Your Name March Credit Card Bill (received in early April)
Prior Balance $ 1,107.30
Interest on prior balance $ 11.07
Purchases in March $ 0.00
Over the limit fee $ 35.00
Late Payment fee $ 35.00
Total Due $ 1,188.37
Minimum Payment (2%) $ 23.77
Finally, how many dollars in fees have you incurred?__$105___ How much in interest?
__$15.97_________
NOTES
1. Q: Do I get charged APR if I pay the minimum?
A: If you pay the minimum credit card payment only, you do get charged interest.
Paying the minimum amount required each month merely keeps your account in
good standing, which saves you from credit score damage but not interest
charges.
Remember that APR is only applied if you are carrying an outstanding balance
on your card, so you can typically avoid paying any interest charges if you pay off
the balance of your card before the statement period ends each month.
2. Q: When are you charged the Penalty APR?
A: A penalty APR that's higher than your card's regular rate can be charged on
future transactions if you don't make your minimum payment by the due date.
In other words, A penalty APR is a higher-than-normal rate that results from
violating a card's terms of service — for example, if you fail to pay your monthly
bill on time.
3. Q: Does 0% APR mean no late fees?
A: Fees: Just because there's no interest doesn't mean there are no fees related
to an offer. Some cards might charge a balance transfer fee, for example.
Penalty APR: You still have to make monthly minimum payments during the
promotional period.
4. Q: If I fail to make a minimum payment by the due date, will I be charged a
late fee AND penalty APR?
A: Yes, if no minimum payment is made by the due date, your credit card
company will likely charge you the penalty APR Fee and could also charge a late
fee. It is important to review the terms and conditions of your credit card
agreement.
