Reference no: EM131093766

Purpose: The Using Consumer Credit Worksheet is designed to test a student’s understanding of credit card interest rates and how to use credit calculations for various purchases.  

1. Calculate the following using the Bankrate calculator at: 

Credit Card Balance       Interest Rate       Minimum/Fixed Payment     Number of Months to Pay in Full    Total Interest Paid

     $5,000                       13%                    Minimum

     $5,000                        18%                    Minimum

     $2,000                        15%                    Fixed $50

      $2,000                        15%                   Fixed $100

• Minimum in this example should be Interest plus 1% of balance, and it will then default to a $15 minimum.

2. When making the minimum payment, how much more interest do you pay when the interest rate is 18% rather than 13%?     

3. In the fixed rate example, how much would you save by doubling the fixed payment to $100 a month instead of $50 per month?  

4. Assume you have a friend who is making the minimum monthly payments on a credit card.  Your friend asks your thoughts on what he is doing.  Based on these calculations and what you have learned, how would you advise your friend about making only minimum payments? Your response should be at least 100 words. 

5. Calculate the cost of credit using the following formulas. Show your calculations. 

Simple Interest: You borrow $2,000 for car repairs. The interest rate is 5%, and you will pay it in full one year later. 

Simple Interest on the Declining Balance: You borrow $2,000 for car repairs. The interest rate is 5% and you will make two equal payments over a year (for example, half in January, and half in July)

Answer each of the following questions in 50-100 words each:

6. Grayson just received his credit card statement.  He noticed a charge for $40 to a store he has never patronized.  What steps should he take to handle this?

7. List the advantages and disadvantages of using credit. Provide at least two of each.   

Home Buying

1. Complete the “Buy or Rent” calculator using your own data. In 50-100 words answer the following: What was the recommendation? What were the factors that led to that recommendation? Do you agree or disagree with the recommendation?  Why?

2. In a minimum of 100 words, explain the main benefits and drawback of renting and of owning a home?

3. Review Exhibit 7-4 on page 224 of the textbook. In at least 100 words, summarize the steps in the home-buying process.

4. Review Exhibit 7-6 on page 229 of the textbook. Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation. Show your calculations.

• Monthly gross income: $2,950

• Other debt, monthly payment: $160

• Down payment to be made: 15% of purchase price

• Monthly property tax and insurance: $210

• 30 year mortgage at 6%

Enter your calculation and response in this column

Step 1: Determine the monthly gross income (annual income divided by 12).

Step 2. Multiply step 1 by 33% for a PITI (principal, interest, taxes, and insurance) guideline.  

NOTE: With a down payment of at least 5%  lenders use 33% of  gross income as a guide for PITI (principal, interest, taxes, and insurance)

Step 3. Subtract other debt payments from the result of Step 2 to determine the Affordable Monthly Mortgage Payment.  

Step 4. Divide the result of Step 3 by 6.00 (this is the mortgage payment factor from Exhibit 7-7 based on a 30 year loan at 6%) and then multiply this by $1,000. This is the Affordable Mortgage Amount.

Step 5. Divide the affordable mortgage amount by .85 (This is 1 minus the down payment percentage) to determine the Affordable Home Purchase.

Car Buying

1. Review Exhibit 6-2 on page 196 of the textbook.  In at least 100 words, summarize the steps in the car-buying process.

2. Using the framework on page 199, prepare a financial comparison of buying and leasing a car with a cash price of $24,000 (ignoring the down payment opportunity cost).  Show your calculations.

Instruction:  Complete the chart below to calculate the cost of buying a car.

• Down payment (to buy/finance): $4,000

• Monthly loan payment: $560

• 48 month loan and lease 

• Value of vehicle at end of loan: $7,200

Steps to Buying a Car taken from “Figure it Out” on page 199 Enter your calculation and response in this column

Step 1. Total down payment

Step 2.  Total cost of payments: Multiply the Monthly Loan Payment by the Length of the Loan

Step 3: Identify the opportunity cost of the security deposit: Multiply the Security deposit by the Length of the Loan by 3%

Step 4.  Add the result of Step 1, 2 and 3.

Step 5: To determine the total cost of buying subtract the Value of the vehicle at the end of the loan from the result of Step 4.

Instruction:  Complete the chart below to calculate the cost of leasing a car.

• Security deposit (to lease): $1,200 

• Monthly lease payment: $440

• 48 month loan and lease 

• End-of-lease charges: $600

Steps to Leasing a Car taken from “Figure it Out” on page 199 Enter your calculation and response in this column

Step 1. Multiply the Monthly Lease Payment by the Length of the Lease

Step 2: Identify the opportunity cost of the security deposit: Multiply the Security deposit by the Length of the Lease by 3%

Step 3. To determine the total cost of leasing add the results of Step 1 and 2 to the End-of-Lease Charges