Question

Below are three advertisements for the same mini fridge from three different stores. You will need to get a credit card from one of the stores in order to buy the fridge. Complete the calculations to determine what the best deal is for you. Show your work!

Mini-Fridge Cost: $300
New Applicant Discount: 10%
Annual Interest Rate: 14.99%
Minimum Monthly Payment: $23

Mini-Fridge Cost: $285
New Applicant Discount: 5%
Annual Interest Rate: 15.99%
Minimum Monthly Payment: $19

Mini-Fridge Cost: $315
New Applicant Discount: 12%
Annual Interest Rate: 12.99%
Minimum Monthly Payment: $26


Part 1: If you only make the minimum payment each month, how long will it take you to pay off each bill AND what is your total for each credit card?

Part 2: If you pay $70 per month for the first 5 months, what will your remaining balance be for each credit card in the 6th month.

Answer 1

Answer:

1. a) 13 months, $293.82. b) 16 months, $302.25. c) 12 months, $296.18
2. a) $71.55 cr. b) $70.17 cr. c) $65.13 cr. (Or, all are 0 in the 6th month)

Step-by-step explanation:

Part 1

The attached spreadsheet shows the remaining balance after each payment for each of the payment scenarios. The negative balance at the end of the payment period represents the credit that the account would have if the last payment is the full minimum payment amount. In real life, the last payment would be reduced by that value.

Card A. The 13th payment will result in a credit. It takes 13 months to pay off the credit card. The total of payments is 13×$23 -5.18 = $293.82.

Card B. The 16th payment will result in a credit. It takes 16 months to pay off the credit card. The total of payments is 16×$19 -1.75 = $302.25.

Card C. The 12th payment will result in a credit. It takes 12 months to pay off the credit card. The total of payments is 12×$26 -15.82 = $296.18.

The best deal is Card A.

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Part 2

All of the cards will be completely paid off in 5 months. The remaining balance in the 6th month is zero. The above "Answer" block shows the credit balance each card will have if payments continue to be made for 5 months.

The best deal is Card A, which will have the lowest total of payments.

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How the calculations are done

The balance at each step in the spreadsheet is computed as ...

  (previous balance) × (1 + rate/12) - (payment)

For example, the balance after the first payment on card A is ...

  $270 × (1 +0.1499/12) -23.00 = $273.37 -23.00 = $250.37

Each calculation is rounded to cents, as it would be on a real credit card.