Question

You owe $3,450.00. Which credit limit gives you an acceptable debt ratio?
(1 point)
Responses

$4,000.00
$4,000.00

$2,000.00
$2,000.00

$7,000.00
$7,000.00

$5,500.00

Answer 1

To determine which credit limit gives an acceptable debt ratio, you need to calculate the debt ratio using the formula:

\[ \text{Debt Ratio} = \frac{\text{Total Debt}}{\text{Credit Limit}} \]

For this situation, your total debt is $3,450. Let's calculate the debt ratio for each of the provided credit limits:

1. **Credit Limit: $4,000.00**
\[
\text{Debt Ratio} = \frac{3,450}{4,000} = 0.8625 \text{ or } 86.25\%
\]

2. **Credit Limit: $2,000.00**
\[
\text{Debt Ratio} = \frac{3,450}{2,000} = 1.725 \text{ or } 172.5\%
\]

3. **Credit Limit: $7,000.00**
\[
\text{Debt Ratio} = \frac{3,450}{7,000} = 0.4929 \text{ or } 49.29\%
\]

4. **Credit Limit: $5,500.00**
\[
\text{Debt Ratio} = \frac{3,450}{5,500} = 0.6273 \text{ or } 62.73\%
\]

Typically, a debt ratio under 30% is considered acceptable.

- For **$4,000**, the debt ratio is 86.25% (not acceptable).
- For **$2,000**, the debt ratio is 172.5% (not acceptable).
- For **$5,500**, the debt ratio is 62.73% (not acceptable).
- For **$7,000**, the debt ratio is 49.29% (not acceptable, but the best outcome compared to the others).

None of the options provide a debt ratio below 30%, which is usually considered acceptable. However, if we need to select the option with the least unacceptable debt ratio, **$7,000.00** would be the choice as it has the lowest debt ratio at 49.29%.