Question

Tony wants to pay off his credit card balances within 12 months. He is trying to decide if he should use his $1,000 in savings to pay off part of the balances or if he should transfer the balances to a new card with a low introductory rate. The new credit card has an introductory rate of 7% but charges a balance transfer fee of $75 for each balance transfer. Evaluate Tony's options and recommend the debt management plan that would give him the lowest monthly payment.
Credit Card A: $794
Credit Card B: $579


a.
Pay off Credit Card B using the savings. Transfer the balance of Credit Card A to the new card.
b.
Pay off Credit Card A using the savings. Transfer the balance of Credit Card B to the new card.
c.
Pay off $500 from both Credit Card A and Credit Card B. Transfer the remaining balances from both cards to the new card.
d.
Pay off all of Credit Card A, and $206 of Credit Card B. Transfer the remaining balance of Credit Card B to the new card.

Answer 1

Assumptions I used
- Each balance transfer to the new card incurs a $75 fee (so transferring two balances costs $150).
- Any amount transferred is subject to the 7% APR (simple amortizing loan), paid off in 12 equal monthly payments.
- Amounts paid from savings are paid immediately (no interest), so only transferred amounts accrue the 7% interest used to compute the monthly payment.

Monthly interest rate r = 0.07/12 = 0.0058333333.
Monthly payment formula for principal P over 12 months:
payment = P * r / (1 - (1+r)^-12).

Now the four options:

a) Pay off Card B ($579) with savings; transfer Card A ($794).
- Transfer principal = 794 + 75 fee = 869
- Monthly payment ≈ 869 * r / (1-(1+r)^-12) ≈ $75.22
- Total paid over 12 months ≈ $902.64

b) Pay off Card A ($794) with savings; transfer Card B ($579).
- Transfer principal = 579 + 75 fee = 654
- Monthly payment ≈ 654 * r / (1-(1+r)^-12) ≈ $56.61
- Total paid over 12 months ≈ $679.32

c) Pay $500 from both cards: remaining A=294, B=79. Transfer both balances.
- Transfer principal = (294 + 79) + 2*75 fee = 373 + 150 = 523
- Monthly payment ≈ 523 * r / (1-(1+r)^-12) ≈ $45.25
- Total paid over 12 months ≈ $543.00

d) Pay off Card A ($794) and $206 of Card B (uses the full $1,000). Transfer remaining B balance (373).
- Transfer principal = 373 + 75 fee = 448
- Monthly payment ≈ 448 * r / (1-(1+r)^-12) ≈ $38.77
- Total paid over 12 months ≈ $465.24

Recommendation
Option (d) gives Tony the lowest monthly payment: about $38.80/month (and also the lowest total cost over 12 months). It uses his $1,000 savings to eliminate one full card and reduce the transferred amount to a single smaller balance, minimizing both transfer fees and the amount accruing interest.

If you want, I can show the detailed intermediate arithmetic or compute payments under other assumptions (e.g., if the new card charges a single fee when you transfer multiple balances, or if you want to include interest on amounts left on original cards).