Question

Suppose that Kathy uses her credit card to cover her expenses and pay her bills. She...

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)

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Answer #1

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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