Question

Michael has credit card debt of $75,000 that has an 12% APR, compounded monthly. The minimum payment only the requires him to pay the interest on his debt. He receives an offer for a credit with an APR of 4% compounded monthly. If he rolls over his debt onto his card and makes the same monthly payment as before, how long will it take him to pay off his credit card debt?

Answer 1

Answer: 122 months.

Step-by-step explanation: The first step is to calculate the minimum monthly payment using the debt balance of $75,000 and 12% APR compounded monthly,which = $75,000 × 12% / 12 = $750 . The second step is to use the same $750 as payment, and using a discount rate of 4%/12, calculate the number of months required to pay off the present value (PV) of $75,000 , which = 122 months.