We have two options for a credit card, VISA and Mastercard. Each one with the following properties:
VISA:
- annual fee of $50
- interest rate of 15%
Mastercard:
- annual fee of $0
- interest rate of 20%
Q) Calculate the total annual expenses of carrying the $1000 balance for each card.
A) Using the data of each credit card and $1000 of balance we calculate the expenses:
VISA:
Balance = $1000
Annual fee = $50
Annual interest = ($1000 x 0.15) = $150
Annual expenses = Annual fee + Annual interest = $50 + $150 = $200
Mastercard:
Balance = $1000
Annual fee = $0
Annual interest = ($1000 x 0.2) = $200
Annual expenses = Annual fee + Annual interest = $0 + $200 = $200
For a balance of $1000 we see that the annual expenses are equal for each credit card. So for a balance of that ammount and paying the balance at the end of the year, both options are equal in what concerns to annual expenses. Now, if we take in account the fact that we may end up paying off the total balance each month. The Mastercard credit card will be a better option because it hasn't any annual fee. For example, if we pay off the total debt after the first month we will have:
VISA:
Balance = $1000
Month interest = ($1000 x 0.15 / 12) = $150/12 = $12.5
Expenses = $12.5
Mastercard:
Balance = $1000
Month interest = ($1000 x 0.2 / 12) = $200/12 = $16.6
Expenses = $16.6
If we cancel the debt in the first month we will have to pay $12.5 of expenses for the VISA plus the annual fee of $50, so at the end of the year the total expenses will be of $62.5, and for the Mastercard the expenses only will be of $16.6.
So the answer is that for a balance of $1000 both credit cards are equal if we cancel the debt at the of the year, but if we pay off the total balance each month the Master Card will be a better option beaucse it hasn't an annual fee.