Question

3.3 Because he does not like the complication of arranging loan deals, Rick considers a third option:

Option C: Paying via Rick’s personal credit card, which has a £5000 limit, an APR of 29%, and currently a zero

balance. Simultaneously arranging the withdrawal of money from his savings account, which contains £2000 but

requires 3 months’ notice of withdrawal (with a charge, 1% of the withdrawn amount, imposed if money is taken out

within three months of giving notice). Then paying off the credit card debt in three months’ time when the money from

the savings account becomes available.

Give one reason why the credit card company charges a much higher interest rate on its loans than does the bank or the

car dealer.

3.4 A friend suggests to Rick that he is wasting money if he runs up a credit card debt for three months as in Option C,

when he could buy the car immediately with his savings. Is the friend correct? Briefly explain your answer.

* I don't understand how I can work out how much he would pay using the credit card over a 3 month period at 29% APR? As I understand this would be charged yearly?

Answer 1

Option 1

If he pay by credit card:

Interest he will pay for per 1000 for 3 month will be:

1000*29%*3/12=72.501

If he pay from Account

Charges he will pay for 1000

1000*1%=10

• So if he pay from the account his cost will be much less, rather than pay from account.

• The credit card company charges a much higher interest rate on its loans than does the bank or thecar dealer because bank or car dealer mortgage the car, intcase of non payment they can take your car but credit card company have limited option they only can wreck your credit rating or file a case in the court.