Suppose that Kathy uses her credit card to cover her expenses and pay her bills. She accumulates a balance of $12,500 at an annual interest rate of 21%. Determine the future value of the total amount she will have to repay, if she takes 6 years to pay it off. Briefly, explain how excessive credit usage can’t lead into financial burden or default on your loans. (Show your work)
Balance = $12,500
Rate of Interest = 21%
Duration to repay = 6 years
Future pending amount would be: [12,500 * (1 + 0.21)6] = 39,230.35
Kathy have to repay $39,230.35 at the end of 6 years
Excessive credit usage would not lead to defalult on your loans because credit card companies offer loan when you maintain a healthy balance sheet which means you maintain a specific amount in your account always which can repay the loan easily. Keeping extra money in your account reduce the probability that customers defalut on loans.
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