Maria’s Savings Decision

Interest compounded semiannually is added to the principal in an account every six months.

Principal = $1,000
Interest rate = 5% paid semiannually (every 6 months)

Step 1: Convert the annual interest rate to a decimal:
5% = 0.05

Maria’s Savings Decision

Principal = $1,000
Interest rate = 5% paid semiannually (every 6 months)

Step 2: Divide the annual interest rate (as a decimal) by 2 to determine the interest paid every six months:

0.05 ÷ 2 = 0.025

​If interest were compounded every 3 months (quarterly), you would divide the interest rate by 4. If interest were compounded every two months, you would divide the rate by 6. If interest were compounded every month, you would divide by 12.

​Bottom line: Divide by the number of times interest is compounded each year.

Maria’s Savings Decision

Principal = $1,000
Interest rate = 5% paid semiannually (every 6 months)

Step 3: Multiply the principal by the interest rate to get the amount paid in dollars. Round to the nearest hundredth.

At 6 months: $1,000.00 × 0.025 = $25.00

Maria’s Savings Decision

Principal = $1,000
Interest rate = 5% paid semiannually (every 6 months)

Step 4: Add the principal and interest to get the new principal.

At 6 months: $1,000.00 + $25.00 = $1,025

Maria’s Savings Decision

Principal = $1,000
Interest rate = 5% paid semiannually (every 6 months)

Step 3 (repeated): Multiply the principal by the interest rate to get the amount paid in dollars.
Round to the nearest hundredth.

At 12 months: $1,025.00 × 0.025 = $25.63

Maria’s Savings Decision

Principal = $1,000
Interest rate = 5% paid semiannually (every 6 months)

Step 5: Repeat steps 2 and 3 to calculate interest and principal for each six-month time period.

​Step 4 (repeated): Add the principal and interest
to get the new principal.

​At 12 months: $1,025.00 + $25.63 = $1,050.63

​$0

$1000

​$50.63

$1050.63

​Advantages and Disadvantages
of Using Credit

Credit Costs

Katarina Smavern is 18 and wants a new laptop that costs $500. She doesn’t have that much money saved. Her friend tells her, though, about a credit card promotion at a local electronics store. Katarina heads to the store and opens an account; she can buy the laptop and take it home with her that day. She is so excited that she doesn’t give much thought to the 21 percent interest rate. “I have a job now,” she thinks to herself. “So I’ll be able to pay this off in no time. The interest rate doesn’t really matter because the minimum monthly payment isn’t very much.” Katarina buys the laptop, takes it home, and pays only the minimum payment due each month.

​Review Katarina's Credit Card Statements:

Credit Costs

Once Katerina pays off the laptop she will have paid $756.00 = $256 in interest.

Katarina could have reduced the amount of interest by paying more than the minimum payment each month or finding a lower interest rate.

If Katarina had paid $10 more each month, she would have made only 25 payments and paid $620.80 for the $500 laptop.

If she paid $30 per month, she would have made 20 payments and paid $596.34.

Keys to Establishing and Maintaining Credit (and Saving Money)

Establish a credit history.
• For example, open a bank account or purchase a cell phone contract.

Pay all your bills on time each month.
• Payments 30+ days late will be noted on your credit report.

• You will avoid expensive late fees if you pay your bills on time.
Late fees are typically $30 or more for the first late payment, and $45 or more for continued late payments.

Keys to Establishing and Maintaining Credit (and Saving Money)

Pay all your bills in full each month.
• The less you owe, the better your credit history will look to potential creditors.

• You will avoid interest charges if you pay your bills in full each month.

Don’t open too many credit card accounts.
• Every credit card account you have appears on your credit report.

• Even if you don't use a credit account that appears on your credit report, creditors will consider how much you could potentially spend if you used all of your accounts.

Keys to Establishing and Maintaining Credit (and Saving Money)

Monitor your credit card usage.
• Check you monthly credit card statements to make sure that you have not been charged for something you did not purchase. If you have, call the credit card company immediately. Your credit card—or at least your account number—may have been stolen.

• Evaluate the interest you are charged each month (if you do not pay your credit cards in full each month) and create a plan so you can pay down your debt and then pay off your cards in full each month.

Keys to Establishing and Maintaining Credit (and Saving Money)

Check your credit reports each year.
• Request a free copy of your credit report from each of the three credit bureaus annually.

• Clear up any inaccuracies on your credit reports.

Keys to Establishing and Maintaining Credit (and Saving Money)

A good credit report is key to a good credit score.

• You will qualify for lower interest rates when purchasing large items such as a car or a house.

• You will have lower car insurance rates.

Your To-Do List

• ​Week 4 Temp Check

• Mid-Quarter Survey
  (at the top of Assignments page)

• Have a great week!