FIN 250 Module 3 Credit and Debt Assignment Example

Credit and Debt Analysis for the Dunbar Household

[Student Name]

Southern New Hampshire University

FIN 250: Personal Financial Planning

Module Three Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Credit and Debt Analysis for the Dunbar Household

Introduction

The Dunbars owe $82,800 across four debts, and Module Two showed that their card balance has barely moved in a year. With a baby due in April and about $1,000 a month freed by the budget changes coming in Project One, they need to know where each extra dollar should go. This paper sets out the terms of each debt, explains what drives their credit scores, compares two common repayment methods, tests a balance transfer and student loan consolidation and recommends an order.

The Four Debts

The table lists each debt with its monthly interest at today's balance.

Debts, October 1

The furniture plan looks free, and that is the trap. The couple bought $3,600 of furniture last summer on a plan that charges no interest if the balance is paid in full by July 31. If even a small amount remains, the store adds interest at 29.99 percent calculated from the purchase date on the original amount, roughly $1,080. At $150 a month, about $300 would still be owed in July. In effect this is the most expensive debt they have, but only if they miss the deadline.

The credit card costs about $158 a month in interest, so a $250 payment reduces the balance by under $100. Soll et al. (2013) found that people commonly underestimate how long minimum or near-minimum payments take to clear a balance, and the Dunbars' statement confirms it: at $250 a month, this card would take more than four years to repay. The truck loan and student loans cost more in total dollars because they are larger, but each dollar of extra payment saves far less.

Credit Scores

Kayla's score is 712 and Marcus's is 648. Both pulled their free reports from the three bureaus and found no errors. Common scoring models weigh payment history and the share of revolving credit in use most heavily. Kayla's payment history is clean and her only revolving account is an unused store card. Marcus has two payments reported 30 days late from the month they moved two years ago, and his card balance is 84 percent of its $9,000 limit. The late payments will matter less each year, but utilization changes as soon as the balance falls. Getting it below about 30 percent, or $2,700, should lift his score noticeably within a few months of the lower balance being reported, which matters if the couple applies for a mortgage around 2030.

Avalanche or Snowball

The avalanche method sends extra money to the debt with the highest rate first and minimizes total interest. The snowball method pays off the smallest balance first, then rolls that payment into the next, which some people find easier to sustain because they see accounts close. Amar et al. (2011) found in experiments that people tend to clear their smallest balances ahead of costlier ones, paying extra interest as a result, a tendency the snowball method builds on.

For the Dunbars the choice is easier than usual, because the two methods give the same order. The furniture plan is both the smallest balance and, given the deadline, the costliest. The card is next by both size and rate. The truck loan, at $31,800 and 7.9 percent, is both smaller and more expensive than the student loans. So the order is the same either way: furniture, card, truck, student loans. That lets the couple enjoy the motivation of quick wins without paying extra interest for it.

A Balance Transfer

Kayla's 712 score may qualify her for a card offering 0 percent on transferred balances for fifteen to eighteen months, usually with a fee of 3 to 5 percent. Moving the $7,600 card balance at a 3 percent fee would cost $228. Under the payoff plan sketched for Project One, the old card would charge roughly $1,100 of interest before it is cleared, so the transfer would save about $850. Three conditions apply. The balance must be paid before the promotion ends; Marcus's old card should stay open but unused, since closing it would raise utilization on the remaining accounts; and no new purchases should go on the transfer card, because many cards apply payments to promotional balances first. Agarwal et al. (2015) show that the federal CARD Act lowered many fees and made pricing clearer, but promotional terms still require close reading.

Student Loans

Kayla's federal loans are the cheapest debt at 5.4 percent. Consolidating them into a federal Direct Consolidation Loan would combine payments but would not lower the rate, which is a weighted average of the old rates. Refinancing them with a private lender might reduce the rate by a point, but it would give up federal options, including income-driven repayment and deferment, that could matter if one parent works fewer hours after the baby. The recommendation is to keep the standard plan and pay no extra on these loans until the other three are gone.

Recommendation

Extra money should go first to the furniture plan, paying it off by the end of November, well before July. Next comes the card, either directly or through a balance transfer, with a target of clearing it by the end of next year even with a pause during Kayla's leave. The truck loan follows, and the student loans stay on schedule. The couple should also set up automatic minimum payments on every account so a busy month with a newborn never produces a late payment, the factor that weighs most in their scores.

Conclusion

The Dunbars' four debts look like one pile of $82,800, but their costs differ sharply. A deferred-interest deadline makes a small furniture balance urgent, high utilization makes the card the main drag on Marcus's credit, and the federal student loans are cheap enough to pay slowly. Because the two payoff methods agree here, the couple can follow one order with confidence.

References

Agarwal, S., Chomsisengphet, S., Mahoney, N., & Stroebel, J. (2015). Regulating consumer financial products: Evidence from credit cards. The Quarterly Journal of Economics, 130(1), 111-164. https://doi.org/10.1093/qje/qju037

Amar, M., Ariely, D., Ayal, S., Cryder, C. E., & Rick, S. I. (2011). Winning the battle but losing the war: The psychology of debt management. Journal of Marketing Research, 48(SPL), S38-S50. https://doi.org/10.1509/jmkr.48.SPL.S38

Soll, J. B., Keeney, R. L., & Larrick, R. P. (2013). Consumer misunderstanding of credit card use, payments, and debt: Causes and solutions. Journal of Public Policy & Marketing, 32(1), 66-81. https://doi.org/10.1509/jppm.11.061