Question

1. Suppose the credit limit on your credit card is $4,925. What is the largest balance you should carry on this card to maintain an acceptable debt ratio? Please explain.

2. Suppose you pay the minimum payment on your credit card by the due date, leaving an outstanding balance of $1,359. The interest rate on your card is 24.45% APR. If you intend to pay off the balance on the card in 1 month, what will the balance be at that point? Notice that the time is given in months, not days, which changes the value of t in the interest formula:

Answer 1

1. To maintain an acceptable debt ratio, the largest balance that we should carry is no more than 30%

So in this case it will be= 30% * 4925

= $1,477.5

2.

Here PV= 1359, r=24.45%/12= 2.04% per month , N=1 (assuming monthly compounding)

So FV after 1 month= 1359*(1+0.0204)1

= $1386.72