Below, you will find two problems in the following areas: Open/Closed End Credit, and Simple Interest. Solve both of these problems. You must show all steps and every single calculation. Thoroughly explain how and why you did each calculation with complete sentences. Include discussion relating the problem to your own personal experiences or to the real world.
Open/Closed End Credit
Credit card companies try to attract new clientele by offering special introductory (or teaser) rates to new customers. For example, the Visa Student Card offers an interest rate of 0% on all purchases and balance transfers for six months. After six months, the rate increases to an annual interest rate of 10.8%. If, however, the customer is late on a payment or exceeds the credit limit, the interest rate jumps to the default rate of 24.8%.
You are shopping around for credit cards and are thinking about switching to the Visa Student Card. Your current credit card has an annual interest rate of 16.5%, and you usually have a large outstanding balance.
- Calculate the interest charge on a $5,000 balance with your current 16.5% annual interest rate.
- Calculate the interest charge on a $5,000 balance with the Visa Student Card’s annual interest rate of 10.8%.
- After calculating both interest charges, would you switch to the Visa Student Card? Explain.
Many large appliance stores offer simple interest loans to their customers. For example, suppose a customer is interested in purchasing a $1,400.00 refrigerator at Myer Appliances. The customer is unable to pay the total amount at the time of purchase, so Myer’s lets the customer make a down payment of $140 and then 12 monthly payments of $120.75.
- Research the selling price of a large appliance that you would like to purchase.
- Suppose that you are unable to pay the total amount for your appliance at the time of purchase, so you take out a simple interest loan. The store will let you make a 10% down payment and then make 12 equal monthly payments for the remaining balance at a simple interest rate of 15%.
- Find the 10% down payment on your large appliance.
- What is the total amount of interest paid on the remaining balance?
- How much will your monthly payments be?