Credit Card Debt Good vs. Bad Debt

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Credit Card Debt Good vs. Bad Debt

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Credit Card DebtGood vs. Bad Debt 12th Grade Advisory Activity

Basic Credit Card Information Credit card average interest rate: 16-17%When credit card bills are paid off within a month, no interest is paidCredit card companies require payment of at least 3% of the principal every month

A Student’s StoryListen for:Payment on the student’s $7,000 debt takes up __% of her earningsMinimum payments on a $2000 credit card bill will take ___ years to pay off debt (Click on the picture to play the video)

Credit Card Scenario #1 Mai charges $1,000 to her credit card for a vacation Her credit card interest rate is high: 20%She only pays the minimum amount per month: 3% of the principal which is $30It takes her 25 years to pay off the debt Mai pays a total of $2,224.06 $1,000 of principal, $1,224.06 of interest That is a major way credit card companies make money

Credit Card Scenario #2 Ed has bad credit rating for not paying previous loansHis interest rate is abysmal because of this: 37%For the same $1,000 loan Ed paid $24,040.81 in interest Mai paid $2,224.06 It took Ed 50 years to pay back the debt These types of situations are too common

Calculating Compound InterestIt is not difficult TA is Total Amount Paid on Loan P is Principal Amount (how much was borrowed) i is Interest Rate of the loan (compounded annually) Most credit card debt is compounded daily but we will just compound the loan annually to keep the math problem simpler. is the number of loan years TA = $1,000: Amount borrowed 14%: interest rate for the credit card (Average rate) 3: Number of years to pay of the loan TA = $1,481.54 $1,481.54 is the amount paid on a $1,000 loan $1,521.54 is the amount paid when compounded daily  

What is Good and Bad Debt? Good Debt Need a necessity but do not have the money to buy itTaking out loans: can afford the monthly paymentsCreates value and provides way to earn more moneyBad DebtThings that can be consumed fairly quickly with no or little cash or personal value Buying something you really do not need Cannot afford the monthly payments Paying high interest on loans

Credit Cards and DebtPaying credit card interest This is usually a bad debtIf you use a credit card, only charge a total amount you can pay in full every monthThis is often not bad debt

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