Final answer:
Making the minimum payment on a credit card avoids default but can lead to significant interest charges over time, making it hard to pay off the balance. Paying more than the minimum reduces the principal faster and results in less interest paid.
Step-by-step explanation:
Paying the minimum payment on a credit card will help a person avoid default but may make it difficult to pay off the balance. When you carry a credit card balance from month to month.
you are required to make at least the minimum monthly payment. This amount is typically a small percentage of your outstanding balance, such as 3%.
While paying just the minimum keeps your account current and avoids late fees, it also means you'll accrue interest on the remaining balance.
Each month, interest is calculated by multiplying your balance by the interest rate, which can range from 12% to 18% annually. This interest adds to the total amount you owe, making it harder to pay off .
For example, if you and a friend both have a $2,000 credit card debt with minimum payments of $60 a month, and you only make the minimum payment while your friend adds an extra $10, your friend will pay off the debt faster and accrue less interest over time.
Moreover, maintaining a balance can impact your credit score, which can be improved by paying all your bills on time and not using too much available credit.
The average annual interest rate for credit card borrowing is about 15%, so Americans end up paying tens of billions of dollars in interest every year.
It's beneficial to pay more than the minimum to reduce the principal faster and lower the interest paid over time.