How a Financial Calculator Can Help Teens Make Decisions About Credit Cards $$$$$$$$$$$$ 2002

Marsha A. Goetting Ph.D., CFP ®, CFCS Professor & Extension Family Economics Specialist Department of Agricultural Economics & Economics Department of Agricultural Economics & Economics

Have you wondered? How long it would take to pay off the balance on acredit card?How long it would take to pay off the balance on acredit card?

Have you wondered? How much you would save in interest charges by increasing your payments?How much you would save in interest charges by increasing your payments?

Workshop You are going to learn how to solve these & similar problems quickly & easily by using a financial calculatorYou are going to learn how to solve these & similar problems quickly & easily by using a financial calculator

Financial Calculator Texas Instruments BA-35 Solar Business Analyst (No longer available)Texas Instruments BA-35 Solar Business Analyst (No longer available) Cost: About $20 at most discount stores Cost: About $20 at most discount stores

Introduction Getting Acquainted with your Financial CalculatorGetting Acquainted with your Financial Calculator

Turn on MODE CE/C 2ndCPT AC/ON N X 12 % i PMTPV FV 12  12 Fix Fix

Financial Mode Fin 0. If FIN is not lower left cornerIf FIN is not lower left corner PressPress MODE AC/ONCPT

Decimal Function FIN 0.00 PressPress 2nd 2nd Fix CPT2

Clearing Screen/Display Press key once Press key once Clears Display Clears Display Corrects Incorrect Entries Corrects Incorrect Entries Clears word “Error” Clears word “Error” CE/C

Clearing Financial Registers Press keyPress key n Clears numbers in registers & display N%iPVPMTFV CE/C2nd CMR

Finance Keys N % i PMT Number of Periods Number of Periods Interest Rate Interest Rate Payment Amount Payment Amount

Finance Keys PV FV Present Value Present Value Future Value Future Value Compute key Compute key CPT

Credit Cards

Minimum Payments Average balance of $1,825 on your bank credit card Average balance of $1,825 on your bank credit card 18% APR 18% APR

Average Balance $1,825 Pay $28 per month Pay $28 per month 21 years to pay off 21 years to pay off $5,231 interest $5,231 interest

Balance $1,825 Pay $28 per month Pay $28 per month 21 Years to pay off 21 Years to pay off $5,231 interest$5,231 interest Pay $38 per monthPay $38 per month 7 years to pay off7 years to pay off $1, interest$1, interest

True Confessions “It took me two minutes to get a credit card & 10 years to get out of it.” Lucy Vailakis, age 29

Payment??? If want to pay off credit card in 1, 2, 3 etc. 3 years, what is the monthly payment?If want to pay off credit card in 1, 2, 3 etc. 3 years, what is the monthly payment?

Goal: Pay off 3 yrs Tricia’s Balance $3,598Tricia’s Balance $3,598 APR 18%APR 18% Payment amount?Payment amount?

Credit Card 3 years Clear registers 2nd CE/C CE/CClear registers 2nd CE/C CE/C Loan Amount 3,598 PVLoan Amount 3,598 PV Periods 3 x 12 = 36 NPeriods 3 x 12 = 36 N % Rate = 1.50 %i% Rate 18  12 = 1.50 %i CPT PMT (don’t clear) CPT PMT (don’t clear)

Credit Card 2 years Clear registers 2nd CE/C CE/CClear registers 2nd CE/C CE/C Loan Amount 3,598 PVLoan Amount 3,598 PV Periods 2 x 12 = 24 NPeriods 2 x 12 = 24 N % Rate = 1.50 %i% Rate 18  12 = 1.50 %i CPT PMT CPT PMT

Interest Difference 3 years = $1, years = $1, years = years = $371.70

Central Idea Paying off credit card balance sooner means higher payments, but you pay less INTERE$TPaying off credit card balance sooner means higher payments, but you pay less INTERE$T

Payment??? Computed payment based on goal of paying off credit card in certain number of years.Computed payment based on goal of paying off credit card in certain number of years. Interest paidInterest paid

Different problem If make certain amount of paymentIf make certain amount of payment How long to pay off?How long to pay off?

How long to pay off? $13,000 owed$13,000 owed 18.5 % APR18.5 % APR $250 payment$250 payment

Credit Card $13,000 Clear registers 2nd CE/C CE/CClear registers 2nd CE/C CE/C Credit balance 13,000 PVCredit balance 13,000 PV % Rate = 1.54 %i% Rate 18.5  12 = 1.54 %i Payment 250 PMTPayment 250 PMT CPT N monthsCPT N months  12 = 8.81 years (Don’t clear)  12 = 8.81 years (Don’t clear)

Compute interest paid Press again:Press again: CPT N CPT N # of monthly payments # of monthly payments

Interest Paid months months x $250 payments x $250 payments $ 26, paid back - 13, loan

Interest Paid $13, paid in interest over 8.81 years $13, paid in interest over 8.81 years

Increase payment Old paymentOld payment $250 New paymentNew payment $450

Credit Card $450 Clear registers 2nd CE/C CE/CClear registers 2nd CE/C CE/C Credit balance 13,000 PVCredit balance 13,000 PV % Rate = 1.54 %i% Rate 18.5  12 = 1.54 %i Payment 450 PMTPayment 450 PMT CPT N monthsCPT N months  12 = 3.21 years  12 = 3.21 years

Calculate Interest How much interest paid in 3.21 years?How much interest paid in 3.21 years?

Compute interest paid Press again:Press again: CPT N 38.53CPT N # of monthly payments # of monthly payments

Interest Paid months months x $450 payments x $450 payments $ 17, paid back - 13, loan

Interest Paid $4, paid in interest over 3.21 years$4, paid in interest over 3.21 years

Interest Difference $ yrs = $13,436.40$ yrs = $13, $ yrs = $ 4,337.99$ yrs = $ 4, $9,098.41

Central Idea By increasing the amount of CREDIT CARD paymentBy increasing the amount of CREDIT CARD payment A loan can be paid off sooner You pay less INTERE$T

Credit Cards Donna’s Balance $6,500Donna’s Balance $6,500 APR 19%APR 19% $130 payments$130 payments

How long to pay off? Clear registers 2nd CE/C CE/CClear registers 2nd CE/C CE/C Loan Amount 6,500 PVLoan Amount 6,500 PV Payment 130 PMTPayment 130 PMT % Rate = 1.58 %i% Rate 19  12 = 1.58 %i CPT N (months) CPT N (months)  12 = 8.32 years (don’t clear)  12 = 8.32 years (don’t clear) 

Compute interest paid Press again:Press again: CPT N 99.85CPT N # of monthly payments # of monthly payments

Interest Paid months months x $130 payments $ 12, paid back - 6, credit balance

Interest Paid $6, interest paid by Donna over 8.32 yrs$6, interest paid by Donna over 8.32 yrs

Increase payment Old paymentOld payment $130 New paymentNew payment $230

How long to pay off? Clear registers 2nd CE/C CE/CClear registers 2nd CE/C CE/C Loan Amount 6,500 PVLoan Amount 6,500 PV Payment 230 PMTPayment 230 PMT % Rate = 1.58 %i% Rate 19  12 = 1.58 %i CPT N (months) CPT N (months)  12 = 3.15 years  12 = 3.15 years 

Compute interest paid Press again:Press again: CPT N 37.76CPT N # of monthly payments # of monthly payments

Interest Paid months months x $230 payments $ 8, paid back - 6, credit balance

Interest Paid $2, interest paid by Donna over 3.15 yrs.$2, interest paid by Donna over 3.15 yrs.

Interest Difference $ yrs = $6,490.86$ yrs = $6, $ yrs = $2,185.58$ yrs = $2, $4,305.28

How a Financial Calculator Can Help Teens Make Decisions About Credit Cards $$$$$$$$$$$$ 2002