Analysis of Credit Card Debt
Darlene Rivas
Argosy University
MAT 109
Professor Morris
October 21, 2015

Abstract
Our best intentions are to provide and ensure that potential credit card consumers are taking a double look and thinking twice before signing a contract from a banker. There are fine prints in contracts, in which inexperienced consumers miss nearly all the time. In this report, consumers will learn how to formulate the annual percentage rate, determine their monthly payment and principal, interest fees that will be applied their monthly payment. There are useful tips to ensure they will be educated in making the right decisions, and determining which plan works out best for them to prevent further debt.

Analysis of Credit Card Debt If a consumer has a credit card with a balance of $5,270.00 with an annual interest rate of 15.53%, they will have to pay a minimum of 2% to the entire balance. Their monthly fee will be $105.40 towards the credit card. Furthermore, $68.20 would go towards the interest, and $37.20 towards the principal. This means that it will take a consumer over 11 years to pay off the principal off to the credit card balance. Assuming that the interest is on a fixed rate, and will not fluctuate throughout the course of time, a consumer would have to contribute an additional $100 towards the principal for the next 5 years, in order to cut the time in half towards paying off the balance. Darlene currently has a Capital One credit card with an outstanding balance of $2500 with an APR at 10%. She will need to determine how much of interest vs. principal she will be paying towards her monthly bill. In order to determine the minimum monthly payment, she will multiply 2500 by .03, which will produce 75. Since Darlene’s minimum monthly payment is $75, she will then need to determine the amount of the interest rate vs. the principal that will be applied monthly; to the outstanding balance. To determine this, the outstanding balance of $2500 will be multiplied by the 10% interest rate, and then multiplied by 1/12 (representing the 12 months) to determine the interest that will be applied to the monthly payment. The formula to determine the interest that will be applied is I= Prt= ($2500) (.10) (1/12) = $20.83. Since $20.83 is the interest that will be applied towards the monthly payment, she will subtract $75 from $20.83 and she will end up with $68.75. Therefore, $68.75 will be the principal and $20.83 will be the interest towards her monthly bill. The duration it will take for Darlene to pay off the principal of her outstanding balance is a little over 36 months. This is determined by multiplying the principal rate by 36, it will produce $2475, which is $25 short of paying of her complete balance of $2500. In addition, there is an annual service fee of fee of $22 and a $30 inactivity fee. The annual interest rate will remain at a fixed 10% as long as the monthly payments are made timely. There will be a $15 penalty fee added onto the monthly bill if any bounced checks come back, or if any electronic payment transaction does not go through. Looking at a credit card bill will provide a consumer the overall picture of how much will be contributed during the course of time when the credit card will be paid off. If a consumer has a Citibank credit card with an outstanding balance of $1,500 and a 14% APR interest rate, it will take the consumer 17 months to pay off their debt and during that time, they will pay a total of $158.65 in interest; only if they decided to pay a fixed monthly payment of $100 rather than the minimum. If the consumer decided to pay the minimum of $45, it would take 102 months to pay off their debt and they would pay $773.18 in total interest. The chart below illustrates the duration time, interest rates, and principal paid during the course of the 17 month payment plan.
|Month |Fixed |Interes|Principa|Remaining |
| |Payment |t |l |Balance |
| | |Paid |Paid | |
|1 |$100.00 |$17.50 |$82.50 |$1417.50 |
|2 |$100.00 |$16.54 |$83.46 |$1334.04 |
|3 |$100.00 |$15.56 |$84.44 |$1249.60 |
|4 |$100.00 |$14.58 |$85.42 |$1164.18 |
|5 |$100.00 |$13.58 |$86.42 |$1077.76 |
|6 |$100.00 |$12.57 |$87.43 |$990.34 |
|7 |$100.00 |$11.55 |$88.45 |$901.89 |
|8 |$100.00 |$10.52 |$89.48 |$812.42 |
|9 |$100.00 |$9.48 |$90.52 |$721.89 |
|10 |$100.00 |$8.42 |$91.58 |$630.32 |
|11 |$100.00 |$7.35 |$92.65 |$537.67 |
|12 |$100.00 |$6.27 |$93.73 |$443.94 |
|13 |$100.00 |$5.18 |$94.82 |$349.12 |
|14 |$100.00 |$4.07 |$95.93 |$253.20 |
|15 |$100.00 |$2.95 |$97.05 |$156.15 |
|16 |$100.00 |$1.82 |$98.18 |$57.97 |
|17 |$58.65 |$0.68 |$57.97 |$0.00 |
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The best advice to young consumers would be to conduct a thorough research on the different type of strategies credit card banks initiate on first time consumers. According to (Calomiris & Mason, 2003 ) , “There is significant heterogeneity across credit card banks in their strategies for attracting customers.” It is essential consumers are reading the contract in depth before signing. There are different methods bank uses in order to draw in young consumers to opening up a credit card account. From this research, we have learned what to look for and what to be cautious of; when considering applying for a credit card. We know that bankers are money hungry and will develop any promising promotion of interest rates at the beginning, however not reading the fine print of the contract only leads to more deficit and more problems. It is important to be aware of what you are actually applying towards your monthly bill. Remember, the lower the payment, the longer it will take to pay off your credit card; hence you will also be paying more interest in the end. Know what you can and cannot afford financially before considering obtaining a credit card.

Reference
Calomiris, C. W., & Mason, J. R. (2003, April). Credit card securitization and regulatory arbitrage. Retrieved from file:///C:/Users/Guest/Downloads/Creditcardsecuritizationandregulatoryarbitrage.pdf