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Conceptual Questions

Q: What is a credit card, and how is it different from a debit card?

A: A credit card allows the user to borrow money from the issuing institution up to a certain limit to make purchases or withdraw cash. The user is then required to repay the borrowed amount, usually with interest if not paid in full. A debit card, on the other hand, directly deducts money from the user’s checking account. With a debit card, you are using your own money; with a credit card, you are using the bank’s money and repaying it later.

Q: Define APR and explain why it is important when evaluating credit cards.

A: APR stands for Annual Percentage Rate. It represents the yearly cost of borrowing money through a credit card, including interest and certain fees. It helps consumers compare the cost of credit between different cards. A higher APR means borrowing is more expensive. Knowing the APR helps you understand how much carrying a balance will cost over time.

Q: What does the “minimum payment” represent, and why is it considered a trap?

A: The minimum payment is the smallest amount a credit card holder must pay to keep the account in good standing. It typically covers interest and a small portion of the principal. It is considered a trap because paying only the minimum allows interest to accumulate, leading to long-term debt and potentially thousands more paid over time.

Q: Explain the concept of a grace period and how it affects interest charges.

A: A grace period is the time between the end of a billing cycle and the payment due date, during which no interest is charged if the balance is paid in full. If you carry a balance beyond the due date, you lose the grace period, and new purchases start accruing interest immediately.

Q: List and briefly describe three types of credit cards commonly available to consumers.

A:

• • Rewards cards – Offer points, miles, or cashback on purchases; best for people who pay off balances monthly.
  • Secured cards – Require a deposit as collateral; used to build or rebuild credit.
  • Student cards – Designed for college students with little to no credit history; lower limits, basic features.

Q: What is the difference between a secured credit card and an unsecured one?

A: A secured credit card requires a cash deposit as collateral, which becomes the card’s credit limit. It is typically used by those with no or poor credit history. An unsecured credit card does not require a deposit and is issued based on the applicant’s creditworthiness.

Q: Identify three common fees associated with credit card use and explain how they are triggered.

A:

1. 1. 1. 1. Annual Fee – Charged once a year for card ownership; some cards waive it.
         2. Late Payment Fee – Charged when the minimum payment is not made by the due date.
         3. Cash Advance Fee – Charged when the cardholder withdraws cash from an ATM using the credit card; interest usually starts immediately.

Scenario-Based Questions

Q: Case Study A: Kevin’s Wake-Up Call

– What are the financial consequences of only making minimum payments over time?

A: Making only the minimum payment causes interest to accumulate rapidly, extending the payoff period and significantly increasing the total cost of the original debt.

– What strategies could Kevin adopt to reduce or eliminate this debt faster?

A: Kevin could start paying more than the minimum, stop using the card for new purchases, create a repayment plan, consider a balance transfer with a lower interest rate, or take on extra income to increase payments.

– If Kevin were to stop using the card, how would it affect his credit utilization ratio?

A: If Kevin keeps the card open but stops adding new charges, his credit utilization ratio will improve as he pays down the balance. Lower utilization generally leads to a higher credit score.

Q: Case Study B: Carla’s Reward Card Decision

– Should Carla apply for this card? Why or why not?  

A: Probably not. Since Carla usually carries a balance, the 19.99% APR could cost her more in interest than she would earn in rewards. The $95 annual fee further reduces the value.

– How do the card’s rewards compare to the potential interest she might pay?  

A: If Carla spends $1,000/month, she earns 1.5% = $15/month in rewards. But if she carries a $1,000 balance, the monthly interest could be around $16.66 (19.99% APR), making the rewards not worthwhile.

– What other card types might suit her better based on her habits?  

A: A low-interest or balance transfer card with no annual fee would suit her better, especially while she pays off her balance.

Q: Case Study C: Elijah and the Store Card

– What risks should Elijah consider before accepting the offer?  

A: The 28% APR is very high, and the lack of a grace period means interest begins immediately. If he doesn’t pay off the full balance, he could end up paying much more than the value of the discount.

– How could this card impact his credit score over time?  

A: If used responsibly, it could help build credit, but high utilization or missed payments could lower his score. Store cards also often have low limits, making it easier to max out and hurt his utilization ratio.

– What questions should he ask before signing up?  

A: What’s the APR? Is there a grace period? Are there annual or late fees? What is the credit limit? Are payments reported to credit bureaus?

Problem-Solving

Q: Jenna has a $1,500 balance on a credit card with a 20% APR. If she only makes minimum payments of 3% each month, calculate approximately how much interest she’ll pay over one year. Compare this to how much she would pay if she made fixed payments of $150 per month.

A:

Minimum payment = 3% of $1,500 = $45 (approximate and decreases monthly)

Estimated interest using the declining balance method ≈ $250–$300 over one year

If she pays $150/month, she pays off the balance in about 11 months

Total interest paid ≈ $135–$140

Conclusion: Fixed payments significantly reduce interest paid and payoff time.

Q: Tomas usually pays his full balance every month. In May, he paid only part of his balance and left $400 unpaid.

– If his card has a 22% APR and compounds monthly, how much interest will he be charged in June if he makes no additional purchases?  

A: Monthly interest = 22% / 12 = 1.83%

Interest = $400 × 0.0183 ≈ $7.32

– How does losing the grace period affect future purchases?  

A: Any new purchases will start accruing interest immediately unless the entire balance is paid in full again, including the $400.

Q: Design a payment plan to eliminate a $2,400 balance in 12 months on a card with 18% APR. What is the minimum monthly payment needed? What budgeting adjustments could help free up that amount?

A:

Monthly rate = 18% / 12 = 1.5%

Use loan formula or online calculator:

Payment ≈ $220/month

Budgeting tips: Cut streaming services, reduce dining out, increase income (side hustle or selling unused items).

Q: Research three credit cards (real or hypothetical) and compare them based on: APR, annual fee, grace period, rewards, and additional perks.

– Which card would you choose and why?  

A: Answers will vary. Students should select the card that best fits their habits (e.g., a no-fee card with long grace period for a budget-conscious user, or a high-reward card for someone who always pays in full).

Q: Track and categorize a hypothetical month of credit card purchases for a student. Then:

– Identify areas of overspending.  

A: Student may find excessive dining out or impulse online shopping. Categories like “entertainment” or “delivery food” often stand out.

– Suggest at least three changes to improve financial health and reduce credit reliance.  

A: Set a food budget and cook more meals, unsubscribe from shopping emails, use a debit card for discretionary expenses.

Q: Write down 5 credit card habits you currently have or think you might develop. Then, for each:

– Label it as healthy or risky.  

– Propose an action to reinforce or improve the habit.

A: Examples:

1. 1. 1. Paying full balance monthly – Healthy – Keep using autopay.
      2. Ignoring statements – Risky – Set calendar reminders.
      3. Using card for emotional spending – Risky – Pause before swiping; wait 24 hours.
      4. Tracking spending weekly – Healthy – Maintain spreadsheet or use app.
      5. Opening too many cards for perks – Risky – Limit new applications to 1–2 per year.