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.

   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.

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.
   • 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.
   • A score is a record of each bill ever paid, so one late payment is shown forever.

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?

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

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?

   • $75: the difference between the $100 payment and the $25 payment.
   • About $180: the interest falls from $226 to $46.
   • $46: the interest paid when the monthly payment is $100.
   • $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.
   • The APR drops when the payment doubles to $50, so each month has less interest than before.
   • Interest is charged on payments, so a bigger payment of $50 means a bigger share of it is interest.
   • In month one, interest of $12 takes nearly half of a $25 payment but under a quarter of $50.
10. 6.

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

    • 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.
    • A $25 payment pays the balance off at no extra cost, since the payment is small and steady.

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

13. 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.

14. 8.

    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.
    • Saving it, because a safe 4% on $50 beats a debt that the lender will carry anyway.
    • 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.

15. 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.

16. 9.

    Tala reads the card for a school finance club. Which claim goes beyond what the card shows?

    • 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.
    • After one year Plan B's balance is $1,240 and Plan A's is $1,100.
    • On a $1,000 balance with no payments, Plan B adds $140 more interest than Plan A.
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 takes 34 months and $226 of interest to clear a $600 balance.
    • At 24% APR, a $25 payment takes 14 months and $93 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.