Question

Garth was amazed to hear that his friend Lindsey always pays off her credit card balance each month. Garth just assumed that everyone used credit cards the same way​ - buy​ now, pay later​ - only in his​ case, months later. He buys almost everything he needs or​ wants, including​ clothes, food, and entertainment with his card. When Lindsey asked him about the balance calculation​ method, APR, grace​ period, or other fees and features of his​ card, Garth was clueless. He reasoned that his credit card was a safe and convenient way to shop and it allowed him to buy expensive items by paying minimum monthly payments.​ Overall, Garth thought of himself as a responsible credit​ user, despite the fact he had been late making a few monthly​ payments, and, once or​ twice, had gone over his credit limit. He also uses his card regularly to obtain cash advances. After hearing all of​ this, Lindsey is worried about her friend. She has come to you for help in answering the following questions. a. What type of credit user is​ Garth? Based on your​ answer, what is the number one factor that should influence​ Garth's choice of a credit​ card? b. Lindsey insisted that Garth request a free credit report. List and briefly explain the information that Lindsey will need to help Garth decipher his report. c.​ Nathaniel, another​ friend, suggested that Garth should obtain a secured credit​ card, or better yet a Titanium card. Do you​ agree? Why or why​ not? d. Based on what you know about​ Garth, what kind of additional fees and penalties is he most likely to​ encounter? What is the impact of these fees and penalties on​ Garth? e. Explain the differences in credit card interest rates when described as a​ fixed, variable,​ teaser, or penalty rate. How do these different rates affect the cost of using a credit​ card? f. What factors should Garth consider if he decides to transfer his current card balance to another​ card? g. Much to​ Garth's surprise, his application was rejected. What​ actions, if​ any, should he​ take? Why should he be concerned about this rejection if he still has his other​ cards? h. Using this table LOADING...​, determine how many months Garth will need to pay off a ​$3000 outstanding balance if he pays  $ 150 per month with an APR of 15 percent and he does not make any additional purchases. Tell Garth how much his monthly payment needs to be in order to eliminate his debt in 11​ months, assuming no additional purchases. i. After​ Lindsey's crash course on credit​ education, Garth decided to discipline himself by closing a couple of his older accounts. Is this a good​ strategy? j. What advice would you give Garth if he has trouble paying his credit card bill in the​ future?

Answer 1

Since, there are multiple parts to the question, I have answered the first four.

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Part 1)

In the given case, Garth will be treated as a "Credit User". It is because he is utilizing the credit available to him, but is not paying the amount due on time. He always has some amount of unpaid balance that is carried forward to the upcoming month/months.

As some amount is always unpaid, Garth will be required to pay interest on such unpaid balance which can turn out be substantially high. Therefore, the number one factor that should influence​ Garth's choice (of a credit​ card) is the interest rate/APR charged (on the unpaid balance) by the credit card issuing bank/financial institution. Garth should select a credit card which carries a lower rate of interest.

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Part 2)

The information that will be needed by Lindsey to decipher Garth's credit report is provided below:

1) Lindsey will need to know the period for which Garth has been holding the credit card.

2) Lindsey will also require information on any other loan/debt that has been obtained by Garth during the relevant period.

3) Lindsey will also need information on any other credit card/loan/debt on which Garth has defaulted in the past. In other words, Garth failed to clear the dues completely.

4) Lindsey will require information on the payments that have been made by Garth from time to time in order to arrive at the average amount that remains unpaid at the end of every month/credit card payment cycle.

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Part 3)

No, Garth shouldn't obtain a secured credit card. It is because a secured credit card would require pledging of some asset in order to cover the risk of non-payment/default by Garth. The credit card issuing company/financial institution can sell the asset so pledged in order to recover the dues in the event of any default in payment by Garth. However, Garth may have to obtain a secured credit card if he has an extremely bad credit history as no bank/financial institution will issue him a credit card without obtaining security.

Based on the credit card payment history, Garth will not qualify for a titanium card. Titanium cards are issued to individuals who have excellent credit score, that is, who have cleared their dues on time and enjoy a clean credit report.

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Part 4)

If Garth will continue to delay his payments, he is likely to pay late-payment fees and penalties for using credit over the limit authorized on his credit card. Further, he is also using the card to obtain cash advances, on which he will to pay a higher rate of interest. A continous delay in payments will result in accumulation of amount due to be paid resulting in higher in interest rates as per bank's/financial institution's credit card policy. His credit score will also get affected which will affect his ability to obtain additional loans in the future. He may not even be able to obtain additional credit card or qualify for a better credit card in future.