Tim would like to use his income tax return to pay off one of his four credit cards. His previous plan was to pay off all four credit cards in the same timeline of 36 months. He wants to eliminate the card that is charging him the most interest on a monthly basis. The chart below outlines Tim's four credit cards, their balances, and their APRs. Which credit card should Tim use his tax return to pay off?
| Credit Card | Balance | APR |
| :---------- | :--------- | :-- |
| A | $1,260.00 | 12% |
| B | $900.00 | 18% |
| C | $1,290.00 | 9% |
| D | $1,200.00 | 16% |
A. A
B. B
C. C
D. D
Answer (2)
Calculate the monthly interest for each credit card: A = $12.60, B = $13.50, C = $9.675, D = $16.00.
Compare the monthly interest charges.
Identify the credit card with the highest monthly interest charge: Credit Card D.
Tim should pay off Credit Card D: D
Explanation
Understanding the Problem Tim wants to pay off the credit card that is charging him the most interest on a monthly basis. We need to calculate the monthly interest for each card and compare them.
Calculating Monthly Interest First, we calculate the monthly interest rate for each credit card by dividing the APR by 12. Then, we calculate the monthly interest charged for each credit card by multiplying the monthly interest rate by the balance.
Card A Interest Credit Card A: Monthly interest = $1260.00 * (12%/12) = $1260.00 * 0.01 = $12.60
Card B Interest Credit Card B: Monthly interest = $900.00 * (18%/12) = $900.00 * 0.015 = $13.50
Card C Interest Credit Card C: Monthly interest = $1290.00 * (9%/12) = $1290.00 * 0.0075 = $9.675
Card D Interest Credit Card D: Monthly interest = $1200.00 * (16%/12) = $1200.00 * 0.013333 = $16.00
Comparing Interests Comparing the monthly interest charges, we have: Card A: $12.60 Card B: $13.50 Card C: $9.675 Card D: $16.00 Credit Card D has the highest monthly interest charge.
Final Answer Therefore, Tim should use his tax return to pay off Credit Card D.
Examples
Understanding how interest accrues on credit cards can help you make informed decisions about which debts to prioritize. For example, if you have multiple credit cards or loans, knowing the APR and balance of each can help you determine which one is costing you the most in interest each month. Paying off the highest-interest debt first can save you money in the long run and help you become debt-free faster. This is a common strategy in personal finance known as the debt avalanche method, where you tackle debts with the highest interest rates first, regardless of the balance.
Tim should pay off Credit Card D, which has the highest monthly interest charge of $16.00. This action will save him the most money in interest over time. Paying off high-interest debt first is a common financial strategy.
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