Your parents have 3 credit cards. Each has its entire credit line used, and the credit limits are $1,800.00, $2,600.00, and $3,500.00. Paying off and closing which card would increase your parents' debt ratio the most?

Question

(1 point)
Responses

$3,500.00 limit
$3,500.00 limit

$2,600.00 limit
$2,600.00 limit

$1,800.00 limit
$1,800.00 limit

The debt ratio remains the same.

Answer 1

To determine which credit card, when paid off and closed, would increase your parents' debt ratio the most, we first need to understand how debt ratio is calculated. The debt ratio is generally calculated as:

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

1. Current Situation:

   • Total credit limits: $1,800 + $2,600 + $3,500 = $7,900
   • Total debt: $1,800 + $2,600 + $3,500 = $7,900
   • Current Debt Ratio: \( \frac{7,900}{7,900} = 1 \) or 100%

2. Effect of Closing Each Card:

   • If the $3,500 limit card is closed:

     • Remaining credit limit: $1,800 + $2,600 = $4,400
     • New debt ratio: \( \frac{7,900}{4,400} \approx 1.795 \) or 179.5%

   • If the $2,600 limit card is closed:

     • Remaining credit limit: $1,800 + $3,500 = $5,300
     • New debt ratio: \( \frac{7,900}{5,300} \approx 1.489 \) or 148.9%

   • If the $1,800 limit card is closed:

     • Remaining credit limit: $2,600 + $3,500 = $6,100
     • New debt ratio: \( \frac{7,900}{6,100} \approx 1.295 \) or 129.5%

3. Conclusion: Among the three options, closing the $3,500 limit card results in the highest debt ratio of approximately 179.5%.

Therefore, the answer is: $3,500.00 limit