0

2. Instead of using a fixed regular payment (as in annuities), credit cards often charge a

minimum payment per month. This amount may change as you pay back the loan. Recall

that in order to use annuity formulas, the monthly payments need to be equal, so we

will have to use Excel to deal with this!

You make a $1000 purchase on a credit card. Because you are extremely tight on cash,

you pay the minimum payment each month for the card. The minimum payment for this

credit card is 2.5% of the balance of the card; also, the smallest minimum payment

allowed is $20. The interest rate on this card is 19.25% compounded monthly.

a. Fill in the following table by hand. Make sure to pay careful attention to what

the minimum payment will be each month, and show your calculations.

Month

Balance at

the Start of

Month

Minimum

Payment

Amount

Applied to

Interest

Amount

Applied to

Principal

Ending

Balance

1 $1000

2

3

b. Now use a spreadsheet to achieve the same calculations as above and extend

them further! Ensure that your minimum payment is never below $20 (this will require you to go in at some point and alter your payment column).

c. Now use your spreadsheet to answer the following questions:

i. How long will it take to pay off the balance on this credit card?

ii. How much will you pay in interest over this time?