Question

Thomas has four credit cards, and he has ended up charging more than he could pay for. Now he carries a total of $9,000 balance on his credit cards that charges an average of 21.99% APR (daily compounding). He is now considering opening a new one that promises zero percent introductory interest rate for a year on balance transfers and then 23.99% APR thereafter. If he does, however, there will be a one-time fee of 4% of the transferred amount. Should he take advantage of the new card? Under what conditions should he do it?

Answer 1

THE ASSUMPTION HERE IS THAT NO PRINCIPAL IS BEING REPAID OVER THE COURSE OF THE FIRST TWO YEARS. ONLY INTEREST IS BEING PAID & THERE ARE NO OTHER FEES/CHARGES BEING LEVIED.

If Thomas doesn't do a balance transfer, then the interest he pays over two years is approximately:

[{9000 * (1+ 0.2199/365)^{^365*2}}- 9000], which equals 4969.72. Hence, average monthly interest over the course of two years would equal 207.07

If Thomas does do a balance transfer, then he pays no interest in the first year.

However, in the second year, the interest he would pay would equal:

[{9000*(1.04) * (1 + 0.2399/365)^{^365}} - 9000(1.04)], which equals 2536.76. Hence, average monthly interest over the course of two years would equal 105.69

Judging by the above, it is certainly advantageous to perform a balance transfer, but subject to the assumptions stated above.

Hope this is what you are looking for!

answered by: anonymous