Credit and debt: interest rates, credit scores and loans

Grade 12 Social Studies Worksheet - Building Confidence

Circle the best answer.

1. Read this first

   A $1,000 balance for one year (example figures, made up for practice)

   Plan	APR	Interest after one year	Balance after one year
   Plan A	10%	$100	$1,100
   Plan B	24%	$240	$1,240

   APR is the yearly cost of borrowing as a percent of the amount owed. This simple example uses no payments and no monthly compounding.

2. 1.

   Ari compares the two plans on the same $1,000. Which statement does the card support?

   • Plan B costs $140 more than Plan A, because its APR is 14 points higher.
   • Plan A costs $140 more than Plan B, because a lower APR makes the lender charge more.
   • Plan B costs 14 times as much as Plan A, because 24 is 14 more than 10.
   • Plan B costs $24 more than Plan A, because APR is a flat fee on each loan.

3. Card

   Credit scores (the Consumer Financial Protection Bureau's description, in our words). A credit score is a prediction of credit behavior based on a person's credit reports. Most credit scores range from 300 to 850. Factors that scoring models consider include a person's bill-paying history, how much of the available credit is being used, and how long loan accounts have been open.

4. 2.

   Which statement does Esme find supported by the card?

   • Scores run from 0 to 1,000, and each bank sets the number for its own customers.
   • A score is a record of each bill ever paid, so one late payment is shown forever.
   • Income alone decides a score, so a bigger paycheck automatically raises it.
   • Most scores run from 300 to 850, and paying bills on time is one factor in a score.

5. Card

   Two adult borrowers (made up for practice). Dana pays every bill on time but uses 95% of her credit limits. Eli uses 10% of his credit limits but paid two bills late last year. Both factors are on the Consumer Financial Protection Bureau's list of what scoring models consider.

6. 3.

   A classmate says one of them has the lower score. What can Jun say from the card?

   • Eli has the lower score, since late payments count more than how much credit is used.
   • Dana has the lower score, since using 95% of her credit is worse than paying late twice.
   • The card cannot say: it names the factors but gives no weights, so neither can be called lower.
   • The scores are equal, since each borrower is strong on one factor and weak on one.

7. Paying off a $600 card balance (example figures, made up for practice)

   Monthly payment	Months to pay off	Total interest paid
   $25	34	$226
   $50	14	$93
   $100	7	$46

   The card charges 24% APR, which is 2% a month on the balance still owed. There are no new purchases.

8. 4.

   Kira compares paying $25 a month with paying $100 a month. How much interest does the larger payment save?

   • $46: the interest paid when the monthly payment is $100.
   • $75: the difference between the $100 payment and the $25 payment.
   • About $180: the interest falls from $226 to $46.
   • $226: the whole amount of interest disappears when the payment is $100.
9. 5.

   Doubling the payment from $25 to $50 cuts the time from 34 months to 14. Which reason does Luz give?

   • 14 is less than half of 34, which is just a rounding effect of the $25 and $50 schedules.
   • In month one, interest of $12 takes nearly half of a $25 payment but under a quarter of $50.
   • Interest is charged on payments, so a bigger payment of $50 means a bigger share of it is interest.
   • The APR drops when the payment doubles to $50, so each month has less interest than before.
10. 6.

    Milo writes one claim from the table for a class debate. Which claim does the table support best?

    • A $25 payment pays the balance off at no extra cost, since the payment is small and steady.
    • Paying more each month shortens the payoff time and lowers the total interest.
    • The total interest is the same for each payment, since the APR is the same.
    • Paying $100 a month costs more in total, since the payments are bigger than the others.

11. Card

    a card rate and prices (made up for practice). A card charges 24% APR in a year when consumer prices rose 3%. The real cost of borrowing is about the APR minus the rise in prices.

12. 7.

    Which estimate of the real cost of borrowing does Noah get for that year?

    • About 3%: the rise in prices is the true cost, and the APR is just a label.
    • About 8%: the 24% APR divided by the 3% rise in prices.
    • About 27%: the 24% APR plus the 3% rise in prices.
    • About 21%: the 24% APR minus the 3% rise in prices.

13. Card

    Two loans (made up for practice). Loan 1 is a car loan; if the borrower stops paying, the lender may take the car. Loan 2 is a card balance; no property is pledged.

14. 8.

    Which statement does Pia find correct?

    • Both loans are secured, since a borrower who stops paying faces some consequence.
    • Loan 1 is unsecured, since the car belongs to the borrower and not to the lender.
    • Loan 1 is secured by the car, so the lender can take it if payments stop; Loan 2 is unsecured.
    • Loan 2 is secured by the card, so the lender can take the card holder's home if payments stop.

15. Card

    One extra $50 (made up for practice). An adult has a card balance at 24% APR and a savings account that pays 4%. The adult has $50 extra this month and wants the choice with the larger yearly gain in dollars. Ignore taxes and risk.

16. 9.

    Which comparison does Ren make for the extra $50?

    • Paying the card avoids 24% interest on $50, far more than the 4% that savings would earn.
    • The card, but just because debts must be paid before any money is saved.
    • Either one, because $50 is the same $50 whether it sits in a bank or goes to the card.
    • Saving it, because a safe 4% on $50 beats a debt that the lender will carry anyway.
17. 10.

    The card charges 24% APR, which is 2% a month on the balance still owed. There are no new purchases. A note says a minimum payment pays off a card quickly. Zee fixes it with the table. Which fix is correct?

    • At 24% APR, a $25 payment does not clear a $600 balance, since interest takes the whole payment.
    • At 24% APR, a $25 payment takes 14 months and $93 of interest to clear a $600 balance.
    • At 24% APR, a $25 payment takes 34 months and $226 of interest to clear a $600 balance.
    • At 24% APR, a $25 payment takes 7 months and $46 of interest to clear a $600 balance.