Chris opened up a new Visa credit card and credit line with U.S. Bank. He is a paying a 15% annual percentage rate (APR) on all new purchases.
a. If he has a current balance of $2,800 on this credit card, how much does he owe in interest to the bank next month? (Section 8.3) (2 points)
b. If he sends in a payment to U.S. Bank for $140, how much of that will go toward paying off his principal balance? (Section 8.3) (1 point) 7.
It is recommended that your monthly credit card payments never amount to more than 20% of your net take-home income. If Chris earns $3,600 per month, what is the most he should make in credit card payments per month to the bank? (Section 7.7) (1 point)
To calculate the answers to these questions, we will use the formula for calculating credit card interest:
a. To find out how much Chris owes in interest to the bank next month, we need to calculate the interest on the current balance. The formula to calculate interest is:
Interest = (Balance * APR/12)
In this case, the Annual Percentage Rate (APR) is 15% and the balance is $2,800. Plugging these values into the formula:
Interest = (2800 * 0.15/12) = $35
Therefore, Chris will owe $35 in interest to the bank next month.
b. To determine how much of the $140 payment goes towards paying off his principal balance, we need to subtract the interest from the total payment amount. Using the same formula as above, we already know the interest is $35. So:
Principal Payment = Total Payment - Interest
Principal Payment = $140 - $35 = $105
Therefore, $105 of Chris's $140 payment will go towards paying off his principal balance.
c. According to the recommendation that monthly credit card payments should not exceed 20% of net take-home income, we can calculate the maximum amount Chris should make in credit card payments per month. In this case, Chris earns $3,600 per month. Using the recommendation formula:
Maximum Credit Card Payments = Net Take-home Income * 20%
Maximum Credit Card Payments = $3,600 * 0.20 = $720
Therefore, Chris should make credit card payments of no more than $720 per month to the bank.