Lesson 6
2. 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?
Louise’s Gross Income / = / $2,000Less: Income taxes / = / -400
Less: Social Security Tax / = / -160
Less: IRA contribution / = / -80
Net take-home pay / = / $1,360
Her monthly payments on VISA, MasterCard, Discover Card, and a car loan add up to $370 per month. Louise’s debt payments to income ratio is 370 to 1,360, or 27.2 percent. This ratio exceeds the recommended 20 percent figure. Therefore, Louise is overextended. Her maximum monthly loan and credit card payments should not be over $272 (20 percent of $1,360).
7. Fred Reinero has had a student loan, two auto loans, and three credit cards. He has always made timely payments on all obligations. He has a savings account of $2,400 and an annual income of $25,000. His current payments for rent, insurance, and utilities are about $1,100 per month. Fred has accumulated $12,800 in an individual retirement account. Fred’s loan application asks for $10,000 to start up a small restaurant with some friends. Fred will not be an active manager; his partner will run the restaurant. Will he get the loan? Explain your answer.
Even though Fred has always made timely payments on all obligations, he is not likely to get a $10,000 loan to start up a small restaurant with some friends. The lender knows that Fred will not be an active manager, and his partner may not have any experience in running a restaurant. Moreover, restaurants have one of the highest failure rates in the business world.
His current yearly income of $25,000 minus expenses for rent, insurance and utilities will leave just enough money to live. His savings of $2,400 are not sufficient to pay off a loan, and he can not access a $12,800 IRA account until he is 59 ½ years old.
Hard Lesson on Credit Cards (p. 196)
1. Why should parents of college students beware?
Parents should beware because their children at college are highly sought-after credit card customers. Students may easily get into heavy debts.
2. How do credit card marketers entice college students?
Credit card marketers entice college students by offering free t-shirts, chances to win airline tickets, and no cosigners are required for those 18 or over.
3. Where do students turn for help when they get into debt trouble?
Students turn to their parents for help.