A young person turns eighteen and heads off to college or perhaps starts working. He is blasted with offers of easy credit. Low introductory rates, free t-shirts and water bottles, and access to quick cash entice him to sign up. Then, he goes shopping. Without a basic understanding of how credit works, he can get thousands into debt before he even knows what hit him!

Of course, credit is a complicated topic. This lesson focuses on the basics of borrowing with a credit card including interest rates, monthly compounding intervals, and different payback options. By comparing a few different scenarios, students will understand how much an item can really end up costing when it's purchased with a credit card.

Students will

  • Compare the consequences of not paying balances on two cards with different APRs
  • Observe the effect of adding monthly compounding to the model
  • Compare the effect of paying the minimum versus paying more in how much interest is paid
  • Compare the effect of paying the minimum versus paying more in how long it takes to pay off the balance

Before you begin

Students should be able to calculate a percent increase of r% by multiplying by 1 + r. Familiarity with expressing percent growth as an exponential function is helpful, but not assumed. When calculating successive balances after payments are made, students will use either their calculators or spreadsheets to carry out a recursive process. If they aren't familiar with these techniques, you will need to demonstrate.

Common Core Standards

Content Standards
Mathematical Practices

Additional Materials

  • Graphing calculators or spreadsheet