Don't Pay Too Much

by

Stacy Musgrave

One of the most rewarding parts of teaching mathematics is being able to give students a real world scenario in which they can apply their knowledge. I was recently introduced to an awesome example of this via a project given to students of UGA's Dr. Ma in MATH 1101 (a course in mathematical modeling).

When developing notions of compound interest and continuous interest, teachers often suggest to students that this is practical information. To drill this message in, I've attached a spreadsheet project that can be given to students to help them see what compound interest really does to their money. The overall setup for the project (which should be done by the students in an Excel folder) is that they have some starting amount of money they have charged to a credit card. The card charges some percentage APR, is compounded monthly, and the student chooses to make only minimum payments while paying off the amount. Note, in this example, we assume the student does not make any further purchases with the card.

In my example, the card charges 25.98% APR, and the minimum payment is determined to be the maximum of \$30 or 5% of the previous month's balance. At the end, I suggest some questions that can be asked of students so they get the full impact of the math they have just seen (namely, that only making minimum payments on a credit card is a bad idea...as it will lead to paying excessive amounts in interest).

Variations on this project could include having the student make another purchase for some amount every time their birthday month comes around. Then they will see the number of payments to pay off the amount continue to grow. Also, they could play with the APR to see how valuable having good credit can be to lower your interest rates.