Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
-What is the APY on Monty's default or penalty rate?

Question

Quizplus · Accepted Answer

To find the APY on Monty's default or penalty rate of 36%, we can use the formula: APY = (1 + interest rate/n)^n - 1, where n is the number of times interest is compounded. Assuming the interest is compounded monthly (12 times a year), we get: APY = (1 + 0.36/12)^12 - 1 = 0.4258 or 42.58%. Therefore, the correct answer is choice C.

As for the best choice, Monty should prioritize paying off his credit card debt as soon as possible, starting with the balances carrying the highest interest rates (i.e. cash advances and purchases). He should also try to negotiate a lower interest rate with his bank or transfer the balance to a card with a lower promotional interest rate. It is not advisable to rely on using a certificate of deposit to pay off debt, as this is essentially borrowing against his own savings and can result in penalties or fees. Selling his car may be an option if he needs additional funds to pay off his debt. Ultimately, the best choice depends on Monty's individual financial situation and goals.

Monty Currently Has a Visa Card from His Bank with the Following