Jacob has an outstanding credit card bill of $2000 and the financial institution charges a 22 percent effective annual interest rate on this outstanding balance. Jacob also has $1000 in an investment account earning eight percent per year. For effective debt management, Jacob should
A)borrow more money to invest.
B)borrow money from another financial institution and pay off the $2000 outstanding balance.
C)use the $1000 investment fund to pay down the credit card balance.
D)use the $1000 investment fund to look for potential investment opportunities with higher returns.

Question

Quizplus · Accepted Answer

Jacob should use the $1000 investment fund to pay down the credit card balance. This is because the interest rate on the credit card balance is 22 percent per year, which is much higher than the eight percent return on the investment account. By paying down the credit card balance with the investment funds, Jacob can reduce the amount of interest he will have to pay on the outstanding balance, which will ultimately save him money in the long run. Borrowing more money to invest or looking for potential investments with higher returns may not be the best course of action as it could potentially increase Jacob's debt and additional risks. Borrowing money from another financial institution might be useful, but not necessary as paying off the debt with the investment fund is a more immediate solution.

Jacob Has an Outstanding Credit Card Bill of $2000 and the Financial