Paying Off Credit Card Balances
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Assume you have a $3,500 balance on a credit card with a 14.5% APR. You are only able to make $150 payments each month and you get an offer for a new credit card which will give you 0% on transferred balances for 6 months and then switch to a 16.7% rate. They will charge you 3% on any balance you transfer.
a) To determine how long it will take you to pay-off the current card, complete the spreadsheet by computing the balance, interest, and new balance each month. Remember that periodic interest is charged on the balance at the beginning of each month using the periodic interest rate.
b.) How many months will it take to pay off this card? Answer the first month that has a negative ending balance.
c.) How much will you spend in total to pay-off this card? Note that you will be charged interest in the last month but you will not owe a full $150.
d.) Now create a spreadsheet which tracks how long it will take you to pay-off the new card assuming you transfer the entire $3,500 balance. Remember they will add 3% of the $3,500 onto what you owe; and you will pay no interest for 6 months.
e.) How many months will it take to pay off this card? Answer the first month that has a negative ending balance.
f.) How much will you spend in total to pay-off this card? Note that you will be charged interest in the last month but you will not owe a full $350.
g.) Should you switch cards? Answer yes or no.
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Solution Summary
The Excel file attached contains all of the necessary computations, formulas and solutions to find the time required to pay off a credit card with a $3500 balance.
Education
- MSc, California State Polytechnic University, Pomona
- MBA, University of California, Riverside
- BSc, California State Polytechnic University, Pomona
- BSc, California State Polytechnic University, Pomona
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