Question

Assuming you have $1,500 in your budget this month with which to pay down your credit cards, how much should you pay on each card? (Note: The following data table is independent from the previous question.) If your answer is zero enter "0" Outstanding Required minimum Recommended debt repayment amount Card Interest rate 28% 12% 13% balance $600 2,000 3,000 payment (%) 10% 8% 10% payment (s) Department store card Discover Card VISA Card MasterCard 1 MasterCard 2 14% 4,000 8% [ ) 14% 10% Gasoline card 21% 300 15% $1,500 Total $9,900 When designing a plan to pay off your credit card debt, which credit card should be repaid first? C The department store card, because it has the highest interest rate. OMasterCard 1, because it has the highest balance. The gasoline card, because it has the lowest balance The Discover Card, because it has the lowest interest rate.

Answer 1

Our priority should be getting rid off the card balances that attract the highest interest rates. In this case they are the Department store card and the gasoline cards with interest rates of 28% and 21 % respectively.

At the same time we have to ensure that we are paying off the minimum amount on the rest of the cards as well.

The minimum required payments on the other cards amounts to $780 which leases us with $720 .

We can pay off the balance of $600 on the department store card with the highest interest rate and the remaining $120 can go to the gasoline card.

The recommended payments are summarized below:

			Minimum Required
Card	Interest rate	Balance	Payment(%)	Payment($)	Recommended Payment
Department Store	28.00%	$     600.00	10.00%	$         60.00	$                                   600.00
Discover	12.00%	$ 2,000.00	8.00%	$       160.00	$                                   160.00
VISA	13.00%	$ 3,000.00	10.00%	$       300.00	$                                   300.00
Mastercard 1	14.00%	$ 4,000.00	8.00%	$       320.00	$                                   320.00
Mastercard 2	14.00%	$               -	10.00%	$                -	$                                            -
Gasoline Card	21.00%	$     300.00	15.00%	$         45.00	$                                   120.00
Total		$ 9,900.00		$       885.00	$                               1,500.00

As explained earlier, while deciding to pay off the debt cards, we must pay off the department store card first as it accrues the highest amount of interest. Doing so, will save us money in the long run.