Credit Card Exercise
For each scenario, answer the following questions:
1. What card would you recommend (e.g., grace period, annual fee, APY)? Why?
2. What other financial advice do you have for the individual?
Scenario 1: Jane
1. average credit—tends to pay bills on time but occasionally late; credit score of
600; 620-650 is average.
2. Current card: 18% annual, credit limit of $12,000
3. Typically, carries a credit card balance of $10,000
4. Rents- $700 per month
5. Car payment of $300, 2 years remaining, 6% interest rate
6. Income: $30,000 per year
7. Average annual purchases on a credit card: $7,000
Scenario 2: Fred
1.
2.
3.
4.
excellent credit—always pays bills on time; credit score of 750
Current card: credit limit $7,000
Always pays off credit card debt every month
Owns home: mortgage payment, $750 per month; home equity of $30,000, no
balance at this time, interest rate at prime + 1% (6.5%). Prime is 5.5% now.
5. Car payment of $450, 3 years remaining, 6.5% interest rate
6. Income: $90,000 per year
7. Average annual purchases on a credit card: $40,000
Scenario 3: George
1. poor credit—credit score of 400
2. 10 visa/master card credit cards: Seven have no balances. Credit limits average
$5,000. Three cards have average balances of $4,000 with limits of $10,000. All
cards have a 16% rate. One card is over 30 days late; two cards are 75 days late.
3. Every time there is a good deal for a credit card at a retailer, George applies. He
has 13 retail credit cards. The retail credit cards have average balances of $100.
4. Move every year—current rent $450
5. No car payment
6. Income: $45,000 per year
7. Average annual purchases on a credit card: $12,000
1. You are applying for a $10,000, 48 month auto loan. If you have a FICO/credit
score of 730, rate = 4.96%. If FICO score equals 719, rate = 5.64%. How much
less will your payment be with the lower FICO score? If you are in the 25%
marginal tax bracket, how much will you save on a monthly basis? Assume state
income taxes = 0.
2. How can you reduce the chance of identity theft?