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8.3
Credit and Loans
P
urpose
The role this topic plays in quantitative reasoning
Nearly everyone, at some point in their lives, will take out a loan and/or purchase something on credit.
Understanding how much loans or credit purchases actually cost is critical in one’s decision to take on
such a debt. Many students finish college with student loans, car loans, and credit card debt. Becoming
debt free can be a worthwhile goal, saving perhaps thousands of dollars in interest payments over a
lifetime. Being informed about the cost of credit is the first step on that journey.
(Note that for this activity you will need a scientific calculator and/or a computer with Excel.)
L
earning Goals
What you should learn while completing this activity
1. Calculate the monthly payments on a loan.
2. Calculate the cost of credit
(for major purchases and for credit cards).
3. Explain the difference between a credit card and a debit card.
4. Explain the factors that influence a credit score.
D
iscovery
Finding out for yourself
As you study the websites available at Links A through E on the companion website, think about these
questions:
How are you currently using credit, and what is the use of credit costing you in interest?
What can you do to lower the cost of interest?
How does you credit score affect the interest you pay?
And if you have or are considering a mortgage on a home, what goes into a mortgage payment?
W
hat Do You Already Know?
Tapping into your existing knowledge
1. What is meant by the “average daily balance” on a credit card?
2. How do credit card companies use your average daily balance?
3. What is the effect, over time, of paying only the minimum payment each month on a credit card?
4. What kinds of behaviors can help improve your credit score?
5. What is included in a mortgage payment?
6. Why is the part of your mortgage payment that goes towards the principal so much lower at the
beginning than after a number of years of paying on that mortgage?