Question

You have 3 credit cards: $990.34 (credit limit: $3,500.00), $2,365.78 (credit limit: $4,600.00), and $5,897.65 (credit limit: $8,000.00). You pay off the lowest balance and close the card. What happened to your debt ratio?
(1 point)
Responses

It increased.
It increased.

It decreased.
It decreased.

It remained the same.
It remained the same.

It improved your credit score.

Answer 1

To determine the effect on your debt ratio after paying off the lowest balance card and closing it, we first need to calculate your debt ratio before and after the action.

1. **Current Debt:**
- Card 1: $990.34
- Card 2: $2,365.78
- Card 3: $5,897.65
- **Total Debt = $990.34 + $2,365.78 + $5,897.65 = $9,253.77**

2. **Current Credit Limits:**
- Card 1: $3,500.00
- Card 2: $4,600.00
- Card 3: $8,000.00
- **Total Credit Limit = $3,500 + $4,600 + $8,000 = $16,100**

3. **Debt Ratio (Before):**
- Debt Ratio = Total Debt / Total Credit Limit = $9,253.77 / $16,100 ≈ 0.574 or 57.4%

4. **Pay off and close the lowest balance card:**
- The lowest balance card is Card 1 ($990.34).
- After paying it off, your debt becomes:
- Card 2: $2,365.78
- Card 3: $5,897.65
- **New Total Debt = $2,365.78 + $5,897.65 = $8,263.43**

5. **New Credit Limits:**
- Only Card 2 and Card 3 are left, so:
- **New Total Credit Limit = $4,600 + $8,000 = $12,600**

6. **Debt Ratio (After):**
- Debt Ratio = New Total Debt / New Total Credit Limit = $8,263.43 / $12,600 ≈ 0.656 or 65.6%

Now we can conclude:

- **Debt Ratio Before:** 57.4%
- **Debt Ratio After:** 65.6%

Since the debt ratio increased from approximately 57.4% to 65.6%, the correct response is:

**It increased.**