What role do interest rates play in mounting consumer debt?

Assignment 1: Discussion—Interest Rates

Interest rates are a fact of life that you will encounter both professionally and personally. One area of interest rates that you may be most concerned about are those applied to credit card debt. Let’s say that you had $2400 on a particular credit card that charges an annual percentage rate (APR) of 21% and requires that you pay a minimum of 2% per month. Could you determine the minimum monthly payment? The minimum monthly payment would simply be 2% times the balance as shown:

2% x $2400.00 = 0.02 x $2400.00 = $48.00

So, your monthly minimum payment would be $48.00. Do you know how much of this is being applied to the principal and how much is going to interest? To determine this, you would need to know the simple interest formula.

I = Prt

In this formula, I = interest, P = is the principal (balance), r = is the annual percentage rate, and t is the time frame. To determine the interest per month on a balance of $2400 with an APR of 21%, you would let P = $2400, r = .21, and t = 1/12 (1 month is 1/12 of a year). The interest paid each month would then be:

I = Prt = ($2400)(.21)(1/12) = $42.00

So, you are paying $42.00 per month towards interest. With a minimum payment of $48.00, that means you are paying $6.00 per month towards the balance ($48.00 – $42.00 = $6.00). No wonder it takes so long to pay off a credit card!

Research interest rates and consumer debt using the Argosy University online library resources and the Internet.

Based on the articles and your independent research, respond to the following:

• How is consumer debt different today than in the past?
• What role do interest rates play in mounting consumer debt?
• What are the typical interest rates applied to credit cards, mortgages, and other debt?
• Many of today’s interest rates are variable rather than fixed. What difference does this make to pension plans, housing loans, and other personal finances?