Credit and debt: interest rates, credit scores and loans
Grade 12 Social Studies Worksheet - Building Confidence
Circle the best answer.
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.
Bo asks what the APR number measures. Which description fits the card?
- A monthly fee the lender charges, so 10% of $1,000 is $100 each month of the loan.
- The yearly cost of borrowing as a percent of the amount owed: 10% of $1,000 is $100.
- The share of the loan that must be paid back right away, so 10% of $1,000 is due now.
- The chance that a borrower pays late, so a 24% APR means 24 of 100 borrowers pay late.
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.
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.
- Most scores run from 300 to 850, and paying bills on time is one factor in a score.
- Income alone decides a score, so a bigger paycheck automatically raises it.
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.
Kira compares paying $25 a month with paying $100 a month. How much interest does the larger payment save?
- $226: the whole amount of interest disappears when the payment is $100.
- $46: the interest paid when the monthly payment is $100.
- About $180: the interest falls from $226 to $46.
- $75: the difference between the $100 payment and the $25 payment.
Doubling the payment from $25 to $50 cuts the time from 34 months to 14. Which reason does Luz give?
- 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.
- In month one, interest of $12 takes nearly half of a $25 payment but under a quarter of $50.
- 14 is less than half of 34, which is just a rounding effect of the $25 and $50 schedules.
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.
- 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.
- Paying more each month shortens the payoff time and lowers the total interest.
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.
Which estimate of the real cost of borrowing does Noah get for that year?
- About 8%: the 24% APR divided by the 3% rise in prices.
- About 21%: the 24% APR minus the 3% rise in prices.
- About 3%: the rise in prices is the true cost, and the APR is just a label.
- About 27%: the 24% APR plus the 3% rise in prices.
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.
Which statement does Pia find correct?
- Both loans are secured, since a borrower who stops paying faces some consequence.
- Loan 2 is secured by the card, so the lender can take the card holder's home if payments stop.
- Loan 1 is secured by the car, so the lender can take it if payments stop; Loan 2 is unsecured.
- Loan 1 is unsecured, since the car belongs to the borrower and not to the lender.
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.
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.
- Saving it, because a safe 4% on $50 beats a debt that the lender will carry anyway.
- Either one, because $50 is the same $50 whether it sits in a bank or goes to the card.
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.
Tala reads the card for a school finance club. Which claim goes beyond what the card shows?
- On a $1,000 balance with no payments, Plan B adds $140 more interest than Plan A.
- After one year Plan B's balance is $1,240 and Plan A's is $1,100.
- Plan B's APR is 14 points higher than Plan A's APR.
- Plan A will always be the cheaper plan for any borrower who needs a year of credit.
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 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 does not clear a $600 balance, since interest takes the whole payment.
- At 24% APR, a $25 payment takes 7 months and $46 of interest to clear a $600 balance.