You have four credit cards. Each has a balance of $950.00, but their credit limits are $1,200.00, $2,200.00, $2,400.00, and $3,000.00. Paying off and closing which card would decrease your debt ratio?

Question

(1 point)
Responses

$3,000.00 limit
$3,000.00 limit

$2,200.00 limit
$2,200.00 limit

$1,200.00 limit
$1,200.00 limit

$2,400.00 limit

Answer 1

To determine which card's closure would decrease your debt ratio, we first need to understand what the debt ratio is. The debt ratio is calculated as the total debt divided by the total credit limit.

Currently, you have the following:

• Total balances: $950.00 x 4 = $3,800.00
• Total credit limits: $1,200.00 + $2,200.00 + $2,400.00 + $3,000.00 = $8,800.00

Current debt ratio = Total debt / Total credit limit = $3,800.00 / $8,800.00 ≈ 0.4318 or 43.18%

Now let's analyze the impact of closing each card on the debt ratio:

1. Closing the $3,000.00 limit card:

   • New total credit limit: $8,800.00 - $3,000.00 = $5,800.00
   • New debt ratio = $3,800.00 / $5,800.00 ≈ 0.6552 or 65.52%

2. Closing the $2,200.00 limit card:

   • New total credit limit: $8,800.00 - $2,200.00 = $6,600.00
   • New debt ratio = $3,800.00 / $6,600.00 ≈ 0.5758 or 57.58%

3. Closing the $1,200.00 limit card:

   • New total credit limit: $8,800.00 - $1,200.00 = $7,600.00
   • New debt ratio = $3,800.00 / $7,600.00 ≈ 0.5000 or 50.00%

4. Closing the $2,400.00 limit card:

   • New total credit limit: $8,800.00 - $2,400.00 = $6,400.00
   • New debt ratio = $3,800.00 / $6,400.00 ≈ 0.5938 or 59.38%

From this analysis, we see that closing any of these cards actually increases the debt ratio rather than decrease it. However, in terms of decreasing it to the least extent, closing the $1,200.00 limit card results in the lowest debt ratio compared to the other options.

Therefore, if you need to select a card to close to minimize the increase in the debt ratio, the best option would be:

$1,200.00 limit.