You have credit card debt of $25,000 that has an APR (monthly compounding) of 18

Question

You have credit card debt of $25,000 that has an APR (monthly compounding) of 18%. Each month you pay the minimum monthly payment. 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 9%. After considering all your 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 changing the minimum monthly payment you will be required to pay? (Note: Be careful not to round any intermediate steps less than six decimal places.) You can borrow Son the new card without changing the minimum monthly payment you ill be required to pay. (Round to the nearest dollar.)

Explanation / Answer

Since the APR is monthly compounding , APR per month :

APR per month = 18% /12 = 1.5 %

Monthly payment calculating using APR = $25,000 * 1.5 % = $375

APR per month of the identical credit card = 9% / 12 = 0.75%

Present Value of what can be borrowed on the new card = $375 / 0.0075

= $50,000

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