1. Which of the four factors directly impact your total cost of using the credit card?
The four factors are the interest rate (APR), the amount you borrow (balance), any annual or monthly fees, and whether you pay interest by paying the full balance each month. Of these, the APR, your balance, and any fees directly affect the total cost. If you pay your balance in full every month, you avoid interest and your cost comes mainly from any fees. If you carry a balance, interest adds to what you owe, increasing total cost.
2. Miles is planning to open a credit card, charge only his monthly streaming service subscriptions (less than $50 per month), and pay his entire bill in full each month so that he never has to pay interest. Which factor is most important for Miles to consider when selecting a card? Why?
The most important factor for Miles is the annual fee and the stringency of the rewards and perks vs. the cost. Since his spending is small and he pays in full each month, he wants a card with no annual fee or a very low one and with rewards that are easy to redeem for services he uses. This helps him get value without paying extra, and he still avoids interest by paying in full.
3. Delara is opening a credit card because her budget is tight and she’s struggling to pay expenses based on her income.
- a. Why might a card with a long grace period be in her best interest?
Because a longer grace period gives her more time to pay without interest while she works on her budget, which can help her avoid late interest charges while she gets back on track.
- b. She knows she’ll be making only the minimum monthly payments each month until she can earn more. What other factor(s) might be most important to Delara? Why?
She should look for a card with no annual fee, a low or 0% introductory APR on purchases, and a low ongoing APR after any intro period. She should also consider a card that reports payments to credit bureaus promptly and has a manageable minimum payment, so interest doesn’t pile up quickly while she earns more income.