The Johnsons Attempt to Resolve
Their Credit and Cash-Flow Problems Harry and Belinda have a substantial annual joint income— more than $70,000, in fact. Nevertheless, they expect to experience some cash-flow deficits during several months of the upcoming year (see Tables 1 and 2).
Table 1 Annual Budget Estimates for 2009 for Harry and Belinda Johnson
Table 2 Cash-Flow Calendar for Harry and Belinda Johnson
|
1
|
2
|
3
|
4
|
|
Estimated
|
Estimated
|
Surplus/Deficit
|
Cumulative
|
Month
|
Income
|
Expenses
|
(1 − 2)
|
Surplus/Deficit
|
January
|
$ 5,524
|
$ 5,524
|
$ 0
|
$ 0
|
February
|
5,524
|
5,524
|
0
|
0
|
March
|
5,824
|
5,824
|
0
|
0
|
April
|
5,825
|
5,825
|
0
|
0
|
May
|
5,826
|
5,826
|
0
|
0
|
June
|
5,827
|
6,527
|
−700
|
−700
|
July
|
5,902
|
5,902
|
0
|
−700
|
August
|
5,903
|
6,153
|
−250
|
−950
|
September
|
8,905
|
8,905
|
0
|
−950
|
October
|
5,906
|
5,906
|
0
|
−950
|
November
|
5,908
|
6,113
|
−205
|
−1,155
|
December
|
5,908
|
7,158
|
−1,250
|
−2,405
|
Total
|
$72,782
|
$75,187
|
−2,405
|
|
To resolve this difficulty, the couple is considering two options. One option is to open a credit card account and use it exclusively for those expenditures that will cause the deficits they face. Or they could talk to their bank about opening a line of credit that would allow them to borrow money by simply calling the bank and having money placed in their checking account.
(a) What are the advantages and disadvantages of the Johnsons opening these accounts?
(b) What financial calculations should Harry and Belinda undertake to see whether they could afford to borrow more money at this time?
(c) What might Harry and Belinda do before applying for credit to ensure that they will pay the lowest interest rate possible?