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BUSN380 Week 3 TCO 3 Problem Set 3 - Cost of Credit

# BUSN380 Week 3 TCO 3 Problem Set 3 - Cost of Credit -...

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Problem Set 3 1. Louise McIntyre’s monthly gross income is \$2,000. Her employer withholds \$400 in federal, state, and local income taxes and \$160 in Social Security taxes per month. Louise contributes \$80 per month for her IRA. Her monthly credit payments for VISA, MasterCard, and Discover card are \$35, \$30, and \$20, respectively. Her monthly payment on an automobile loan is \$285. What is Louise’s debt payments-to-income ratio? Is Louise living within her means? Debt Payments-to-Income Ratio = Monthly Credit Payments /Net Monthly Income ANS. \$2000 – (400+160+80) = \$1360 \$1360 – (35+30+20+285) = \$370 Debt Payments-to-Income Ratio = 370/1360 = 0.272 = 27.2% At 27% Louise is spending 7% over the recommended 20% of net income that she should be spending on credit payments, so she IS NOT living within her means. 2. Calculating Debt Payments–to-Income Ratio. Suppose that your monthly net income is \$2,400. Your monthly debt payments include your student loan payment, a gas credit card and they total \$360. What is your debt payments – to – income ratio?

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