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.



Please select the best answer from the choices provided.


A
B
C
D
Mark this and return

Answer 1

Answer: D

Reasoning (brief):
- New-card monthly rate r = 0.07/12. Monthly payment factor for a 12-month payoff = r / (1 − (1+r)^−12) ≈ 0.0866.
- For each plan compute transferred principal + transfer fees, then monthly payment ≈ (transferred total) × 0.0866.

a) Pay off B; transfer A only: transfer = 794 + $75 = $869 → monthly ≈ 869 × 0.0866 ≈ $75.
b) Pay off A; transfer B only: transfer = 579 + $75 = $654 → monthly ≈ 654 × 0.0866 ≈ $57.
c) Pay $500 to each (A→294, B→79); transfer both: transfer = (294+79) + 2×75 = $523 → monthly ≈ 523 × 0.0866 ≈ $45.
d) Pay off A and $206 of B (remaining B = 373); transfer remaining B: transfer = 373 + $75 = $448 → monthly ≈ 448 × 0.0866 ≈ $39.

Option D gives the lowest monthly payment, so choose D.