Question

The Smiths have a credit card balance that is larger than what they are comfortable with, as they are getting close to their credit card’s limit. For the last six months, they have made only the monthly minimum payment, to keep the account current. This payment is barely making a dent in the balance. Joel is concerned that if they continue to make only the minimum required payments they will never pay down this debt.

Their current savings earn 4.5% interest with monthly compounding and their credit cards have rates that average 21.9% interest with monthly compounding. Amber and Joel would like you to show them the effect that the difference in these two rates is having on their savings goals and whether or not this situation is something they should worry about.

Recently they received a letter that invited them to apply for a new credit card with a $50,000 limit. The interest rate is significantly lower (1.2 per cent for the first six months on transfers) than our current credit card. Joel is a little more hesitant about taking on additional credit, as he is concerned about additional payments and thinks that the introductory interest rate might not be something we should rely on.

Comment on this credit card offer.

Answer 1

let us analyze this situation from the perspective of calculation with respect to interest and the overdue payment

as is given

current rate of savings 4.5%

Credit Card rates- 21.9%

As per the current rate there is a deficit to an extent of 17.4% i.e they are paying this amount from their own pocket

so i believe as per the current scenario it is better to pay the expenses by utislising their savings.

As of the New credit Card offer is Concerned

the interest Rate is reduced by a mere 1.2 percent which would further reduce their deficit by 1.2 , but as i earlier higlighted that there is Still a DEFICIT. and if they accept the new credit card offer , they would be in a even bigger deficit as they would pay a additional interest on the above increased limit,

So i believe the Credit card offer should not be accepted.

The answer would have been more precise had the question provided the details with respect to the exact amount of deficit and interest overdue.