Question

5-50 CHAPTER 5 Checking Accounts, Credit Scores, and Credit Cards Calculating the Cost of Life's Financial Journey Belinda is in the process of choosing a credit card. She has narrowed her choice to two cards: ticket. If she uses the cash-back credit card, assume that she will pay a $25 baggage fee for each leg of her trip.) 1. A credit card co-branded with a major airline. The card offers the following features: Instructions Based on this information, which credit card should Belinda choose! What other factors should she consider when making her choice? • 1 mile earned for every $1 spent on eligible purchases. • A $25 per bag fee will be waived for the first bag checked per flight and free priority seating. • The card charges an annual $95 fee. The APR varies from 16.50% to 25.50% based on each borrower's credit score. Other fees, in- cluding balance transfer and late fees, apply. Card miles can be redeemed at the rate of $50 for 5,000 miles. Planning for the Future The Fair Credit Reporting Act (FCRA) gives each consumer living in the United States the right to obtain his or her credit report from one or more national credit reporting agencies. Under FCRA rules, you may order a free annual credit report from each of the three major credit bureaus each year. If you want more than one report from each bureau in a 12-month period, the credit reporting companies may charge a fee. Your credit report is a valuable tool you can use to manage your finan- cial affairs. As such, it is important to make sure that the information used by the credit reporting agencies is correct. One way to do this is to get a copy of your report. 2. A credit card that offers a 1% cash-back rebate on all purchases made with the card during the year. The card offers the following features: • The amount of cash earned never expires, and the cash earned may be redeemed or used to pay outstanding charges. • The card has no annual fee. The APR varies from 11.75% to 23.75% based on each borrower's credit score. Other fees, including bal- ance transfer and late fees, apply. Instructions Go to www.annualcreditreport.com or call a major credit bureau's toll-free number to get the reporting process started. You will be asked to provide personal information, such as your address and Social Security number. Although generally you should never disclose this type of information, in this case it is safe to share these details. Belinda plans to spend approximately $45,000 per year on her credit card. Her plan is make purchases and then pay the balance in full each month. She is not particularly worried about the APR. She is primarily interested to know if the airline credit card is a good option if she plans to make two trips each year to see her family. (When making your calculations, assume that the cost of a flight is $500 for a roundtrip Continuing Project: Your Financial Journey Go to WileyPLUS for complete details and Instructions.

Answer 1

a. Assuming that only Air travel is eligible purchase for Airline credit card

Airline Credit card
Particulars	Amount ($)
No. of trips per year	2
cost per round trip	500
Cost of Air travel (500*2)	1,000
1 mile earned for each $1 spent
No. of miles earned	1000 miles
Miles redeemed at the rate of $ 50 for 5,000 miles
Amount earned on miles redemption	10
Annual fee	-95
Bag check-in cost (waived)	-
Loss on usage of Airline credit card	-85

Rebate credit card
Particulars	Amount ($)
Total purchase during the year	45,000
Rebate received	450
Annual fee	-
Bag check-in cost (2*2*25)	-100
Benefit on usage of Rebate credit card	350

Rebate credit card should be used as it has more benefits compared to Airline credit card

*APR percentage is not considered as Belinda is planning to make payments on timely basis, and not worried about this.

b. Assuming entire $ 45,000 is eligible purchase for Airline credit card

Airline Credit card
Particulars	Amount ($)
Eligible purchase for the year	45,000
1 mile earned for each $1 spent
No. of miles earned	45,000 miles
Miles redeemed at the rate of $ 50 for 5,000 miles
Amount earned on miles redemption (45000*50/5000)	450
Annual fee	-95
Bag check-in cost (waived)	-
Loss on usage of Airline credit card	355

Rebate credit card
Particulars	Amount ($)
Total purchase during the year	45,000
Rebate received	450
Annual fee	-
Bag check-in cost (2*2*25)	-100
Benefit on usage of Rebate credit card	350

Airline credit card should be used as it has more benefits compared to Rebate credit card

*APR percentage is not considered as Belinda is planning to make payments on timely basis, and not worried about this.

Other factors to be considered-

1. Details of APR percentage for both the credit cards are different, so it should be considered in case of delay in payments.

2. Late payment fee or overdue charges also to be taken care

3. Details of eligible purchases for airline credit card should be taken care

4. If the Air travel trips are reduced than 2 per year, then Airline credit card will not be treated as beneficial due to reduction of baggage check-in charges.