You have credit card debt of $25,000 that has an APR (monthly compounding) of 15%. Each month you pay minimum monthly payment only. You are required to pay only the outstanding interest. You have received an offer in the mail for an otherwise identical credit card with an APR of 12%. After considering all hour alternatives, you decide to switch cards, roll over the outstanding balance on the old card into the new card, and borrow additional money as well. How much can you borrow today on the new card without change the minimum monthly payment you will be required to pay?
monthly interest charge on old card = 25000(1/12)(.15) = 312.50
now now you want
(25000 + x)(1/12)(.12) = 312.50
25000 + x = 31250
x = 6250
(Wow, what a dumb move, now you owe $31250 to a credit card company.
Some will raise your rate to about 19% if you are late with one payment )
Can you show me how to do this in excel?
To determine the maximum amount you can borrow on the new card without changing the minimum monthly payment, we need to calculate the outstanding interest on the old card and compare it to the minimum monthly payment.
First, let's calculate the outstanding interest on the old card:
Outstanding Interest = Total Debt * Monthly Interest Rate
Monthly Interest Rate = Annual Percentage Rate / 12
Annual Percentage Rate (APR) on the old card = 15%
Monthly Interest Rate on the old card = 15% / 12 = 0.0125
Outstanding Interest = $25,000 * 0.0125 = $312.50
Next, let's determine the minimum monthly payment on the old card, which is the same as the outstanding interest:
Minimum Monthly Payment = Outstanding Interest = $312.50
Now, let's calculate the monthly interest rate for the new card using the provided APR:
Annual Percentage Rate (APR) on the new card = 12%
Monthly Interest Rate on the new card = 12% / 12 = 0.01
To keep the minimum monthly payment the same, the new card's outstanding interest should also be $312.50.
Now, let's calculate the maximum amount you can borrow on the new card:
Maximum Borrowed Amount = Outstanding Interest / Monthly Interest Rate on the new card
Maximum Borrowed Amount = $312.50 / 0.01 = $31,250
Therefore, you can borrow up to $31,250 on the new card without changing the minimum monthly payment you will be required to pay.
To determine how much you can borrow on the new card without changing the minimum monthly payment, you need to understand how the minimum payment is calculated.
Typically, credit card minimum payments are calculated as a percentage of the outstanding balance. The specific percentage may vary depending on the credit card issuer, but it's usually around 1-3% of the balance.
In this case, since you're only required to pay the outstanding interest each month, the minimum monthly payment will be the interest amount. To calculate the monthly interest, you can use the formula:
Monthly Interest = Outstanding Balance * (APR / 12)
For the existing credit card with an APR of 15%, the monthly interest would be:
Monthly Interest = $25,000 * (0.15 / 12) = $312.50
Now, let's calculate the new minimum payment on the new card with an APR of 12%. The total outstanding balance on the new card will be $25,000 (existing debt) + X (additional borrowing). The monthly interest on the new card will be:
Monthly Interest = (25,000 + X) * (0.12 / 12) = (25,000 + X) * 0.01
Since the minimum monthly payment will be the interest amount, we can set up the equation:
$312.50 = (25,000 + X) * 0.01
To isolate the variable X, we can divide both sides of the equation by 0.01:
$312.50 / 0.01 = 25,000 + X
31,250 = 25,000 + X
Now, we can solve for X:
X = 31,250 - 25,000 = $6,250
Therefore, you can borrow an additional $6,250 on the new card without changing the minimum monthly payment required.