(The Nightmare Continues…)

 Open-Ended Installment Loans differ from Fixed Installment Loans in a number of ways: ◦ They are often referred to as “revolving credit” ◦ These type of loans are usually for multiple items purchased at different times ◦ The payments are dependent on the purchases made that month and the interest rate at the time of purchase (interest rates may change)

 Credit cards are a type of Open- Ended Installment Loan. ◦ The Amount Financed depends upon the credit limit of the card (often a very high amount compared to actual earnings). ◦ Each month, the consumer is only required to pay a small fraction of their balance (minimum monthly payment). ◦ The term of the loan depends on how quickly the consumer wants to pay off the loan.

 Credit cards charge interest using the simple interest formula: I=Prt ◦ I is the interest that will be added on to your balance ◦ P is the amount you currently owe on the loan ◦ R is the interest rate (in terms of a monthly rate; found by dividing the APR by 12) ◦ T is the time of the payment period (usually one month)

 There are three methods for determining what you owe the credit card company. ◦ Unpaid Balance Method ◦ Previous Balance Method ◦ Average Daily Balance Method (most common)  All three use a simple interest formula with time equaling one month. The only difference is the way that they calculate the Principal (the balance on the card).

 This method is the most widely used. The principal is determined by calculating how much you owed on each day of the month, totaling those amounts and dividing by the number of days in that month ◦ Example: If on Jan. 1 st you owed $3500, and on Jan 8 th you made a payment of $750, the principal on Feb 1 st would be ($3500*7 + $2750*23)/30 = $2925

 If your card has an APR of 18%, your monthly interest rate is 1.5%. Your minimum monthly payment will be 2% of your total balance.  Using each of the three methods, here is what you would owe:

 UB: I = ($2750)(1.5%)(1) = $ $2750 $ (2%) = $56 (they round up)  PB: I = ($3500)(1.5%)(1) = $ $2750 $ (2%) = $57  ADB: I = ($2925)(1.5%)(1) = $ $2750 $ (2%) = $56

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Average Daily Balance is often best calculated using a calendar: ◦ Started month owing $3000. Paid $150 on the 8 th. Spent $400 on the 10 th, $250 on the 20 th, and $100 on the 23 rd.  Calculate the ADB for this scenario

 Please complete the following:  8.4, p ; #15-20