1. It takes 5 months to pay off the higher-interest card first.
2. The amount of the last payment on the higher-interest card is $232.89. It is the balance plus interest in the fifth month.
3. After paying down the debt on the lower-interest card in the 5th month, the balance of the lower-interest card is $338.77.
The principal has been reduced. The interest is worked on the reduced principal.
4. If the lower-interest card is paid off first, while the interest on the higher-interest card is paid, the tables would look like the following:
Higher-Interest Card:
Month 1 2 3 4 5 6 7
Principal 1,311.48 1,311.48 1,297.73 1,028.80 732.71 406.71 47.79
Interest accrued 132.46 132.46 131.07 103.91 74.00 41.08 4.83
Payment 132.46 146.21 400.00 400.00 400.00 400.00 52.62
Ending balance 1,311.48 1,297.73 1,028.80 732.71 406.71 47.79 0
Lower-Interest Card:
Month 1 2 3 4 5 6
Principal 475.00 238.34 0 0 0 0
Interest accrued 30.88 15.49 0
Payment 267.54 253.79 0
Ending balance 238.34 0 0 0
5. The savings by paying off the higher-interest card first is $91.86. This is the difference in interest by choosing to pay off the higher-interest card first before the lower-interest card.
Data and Calculations:
Higher-Interest Card:
Month 1 2 3 4 5 6
Principal 1,311.48 1074.82 814.26 527.38 211.53
Interest accrued 132.46 108.56 82.24 53.27 21.36
Payment (on due date) 369.12 369.12 369.12 369.12 232.89
Ending balance 1,074.82 814.26 527.38 211.53 0
Lower-Interest Card:
Month 1 2 3 4 5 6
Principal 475.00 475.00 475.00 475.00 475.00 338.77
Interest accrued 30.88 30.88 30.88 30.88 30.88 22.02
Payment 30.88 30.88 30.88 30.88 167.11 360.79
Ending balance 475.00 475.00 475.00 475.00 338.77 0
Total interest incurred under each method:
Higher-interests:
1st method: 132.46 132.46 131.07 103.91 74.00 41.08 4.83 = $619.81
2nd method: 132.46 108.56 82.24 53.27 21.36 = $397.89
Lower-interests:
1st method: 30.88 15.49 0 $46.37
2nd method: 30.88 30.88 30.88 30.88 30.88 22.02 $176.43
$619.81 + $46.37 = $666.18
$397.89 + $176.43 = $574.32
Difference = $91.86
Question completion:
Card Name (APR %) Existing Balance Credit Limit
MarK2 (6.5%) $475.00 $3,000.00
Bee4 (10.1%) $1,311.48 $2,500.00
You have $400.00 each month to payoff these 2 credit cards. You decide to pay only the interest on the lowest interest card and the remaining amount to the other card.
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