Question

1a. Steven has a job with monthly take-home pay of $3,500. Using the suggested maximum debt safety ratio, what maximum debt burden per month can he assume? (Show all work.)

1b. Jack and Jill have a combined take-home income of $4,500. Their total monthly payments on consumer debt are $875. What is their debt safety ratio? Are they exhibiting any sign of approaching credit problems?

1c. You have a $926 balance on your credit card account. The minimum payment on your account is 2 percent of the latest balance or $20, whichever is greater. What will be the minimum payment this month?

1d. The APR on this account is 18%. Assuming the $926 does not include any interest charge, how much of your minimum payment will be used for interest?

Answer 1

1a. Steven has a job with monthly take-home pay of $3,500. Using the suggested maximum debt safety ratio, what maximum debt burden per month can he assume?

Maximum Debt Safety ratio= 20%

Thus Steven’s maximum debt burden is 0.20 x $3,500 = $700 per month

1b. Jack and Jill have a combined take-home income of $4,500. Their total monthly payments on consumer debt are $875. What is their debt safety ratio? Are they exhibiting any sign of approaching credit problems?

Debt safety ratio= consumer debt payments/ take-home income = $875/$4500 = 19.44%

Jack and Jill are almost on the point of maximum recommended level of consumer debt. Thus they both are exhibiting signs of potential credit problems. Jack and Jill should avoid taking on additional consumer debt.

1c. You have a $926 balance on your credit card account. The minimum payment on your account is 2 percent of the latest balance or $20, whichever is greater. What will be the minimum payment this month?

2%*926 = 18.52 or $20 whichever is greater.

Thus the minimum payment this month would be $20.

1d. The APR on this account is 18%. Assuming the $926 does not include any interest charge, how much of your minimum payment will be used for interest?

926*18%/12= $13.89

Thus $13.89 would be used for interest purposes.