Hinna was recently promoted at work, and now receives an extra $800 in her net monthly income. Currently, she has a credit card balance of $8,000 at a rate of 19 percent and $4000 owing on a line of credit at a rate of six percent. $50,000 on a secured line of credit at a rate of four percent was used to consolidate debt and renovate her home. Hinna's engaged friends, Raj and Candace, have given her conflicting advice. Raj has suggested that she apply the extra $800 monthly cash flow to pay down the debt with the highest interest rate to save more interest. Candace, on the other hand, has recommended that she apply the extra funds toward the smallest debts so that she can see the effect of her extra payment faster. Hinna has approached you as a Financial Planner to understand the two methods. 

Explain to Hinna the advantage and disadvantages of both methods. Calculate the interest costs for each choice.

Answer rating: 100% (QA)

Hinna has two methods to consider when deciding how to allocate her extra 800 monthly cash flow towards her debts the highest interest rate method sug... View the full answer