Problem

This case is available in MyFinanceLab.Maria will be a college sophomore next year and she...

This case is available in MyFinanceLab.

Maria will be a college sophomore next year and she is determined to have her own credit card. She will not be employed during the school year but is convinced that she can pay for credit card expenses based on her summer earnings. Maria’s parents have read a number of articles about the problems of credit cards and college students, including examples of students leaving school after a downward spiral of credit cards, overspending, working to pay bills, worrying about bills, working more hours to pay bills, and eventually withdrawing from school. When Maria showed up with a handful of applications including Visa, a Gold MasterCard, Discover, a Visa sponsored by her university, an American Express, a secured MasterCard, and a gas company card her parents were overwhelmed. Maria admitted she didn’t want them all. “I’m not stupid,” she declared. Since Maria obviously needed to learn about credit cards, her parents agreed to cosign her application on one condition. She had to approach her choice just as she would a class project and research the following questions.

To avoid credit abuse problems, what do you consider to be the most important rules for Maria to follow when using a credit card?

Step-by-Step Solution

Solution 1

Important rules for M to avoid credit abuse problems are as follows:

Pay bills on time: M should pay her debt first, and make this a top priority.

Restrict spending: M must track and curtail her expenses to avoid future financial problems.

Avoid interest by paying bills on time: Outstanding balance attracts higher interest rates. M could avoid this interest expense by paying bills on time.

Avoid extra fees by never carrying a balance forward: Outstanding balance magnetizes some additional charges like a penalty. M could avoid these extra charges through timely payment of bills.

Save for emergencies: An emergency fund is extremely important, as there will always be unexpected emergencies that come up. If M has emergency funds, she can easily avoid the need for debt.

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Solutions For Problems in Chapter 6DC.1