What is the potential long-term financial impact of making only minimum payments on a credit card with a substantial balance and high interest rate?
Understand the Problem
The question asks about the long-term financial consequences of paying only the minimum amount due on a credit card with a significant balance and a high interest rate. It also asks what will occur to the interest rate and overall amount paid if only minimum payments are made.
Answer
It will significantly increase interest paid, extend the repayment period, and negatively affect your credit score.
Making only minimum payments on a credit card with a substantial balance and high interest rate can significantly increase the total interest paid, extend the repayment period by years (potentially decades), and negatively affect your credit score due to high credit utilization.
Answer for screen readers
Making only minimum payments on a credit card with a substantial balance and high interest rate can significantly increase the total interest paid, extend the repayment period by years (potentially decades), and negatively affect your credit score due to high credit utilization.
More Information
A $5,000 balance with an 18% interest rate could take over 20 years to pay off if only the minimum payment is made. Paying just the minimum can lead to 'debt anchoring', where consumers focus on the minimum payment amount rather than the total balance, potentially leading to prolonged debt and increased financial strain.
Tips
A common mistake is underestimating how much interest accumulates over time when making minimum payments. To avoid this, use online calculators to project the total cost of repayment and consider strategies like balance transfers or debt consolidation to lower interest rates.
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