Final answer:
The correct answer is b) 27.99%. This reflects the interest rate on the credit card balance regardless of the minimum payment being made. It is crucial to pay off credit card balances promptly to avoid high interest costs over time.
Step-by-step explanation:
If you owe $1000 on a credit card that has an interest rate of 27.99% and make only the minimum payment of $20 each month, the correct answer is b) 27.99%. The interest rate on your credit card debt does not change based on the amount of your monthly payment; it remains constant as determined by your cardholder agreement. Since the scenario specifies an interest rate of 27.99%, your main concern should be the effect of this rate on your outstanding balance, especially if you make only the minimum payment.
Making only minimum payments on credit card debt can be costly due to accumulated interest charges. When you carry a credit card balance from month to month, you are charged interest on the remaining balance. Since interest is calculated by multiplying your balance by the interest rate, it is always best to pay off your balance as quickly as possible to avoid the high costs associated with compounding interest.
Looking at the broader market, many Americans pay tens of billions of dollars each year in interest on their credit card debts. With average annual interest rates generally around 15%, those with higher rates, such as the 27.99% in this scenario, can find themselves paying significantly more over time if they don't pay off their credit promptly.