What is the main problem with paying only the minimum balance on your credit card each month?

• A. You will receive a higher credit limit immediately.
• B. You will pay more interest over time, increasing your total debt.
• C. Your monthly payment will decrease each month.
• D. Your credit card will be automatically closed by the bank.

Answer: (B)

Verified step by step guidance

1. Understand the concept of credit card payments: When you pay only the minimum balance on your credit card, the remaining balance accrues interest, which increases the total amount you owe over time.
2. Recognize how interest works: Credit card companies charge interest on the unpaid balance. This interest is compounded, meaning you pay interest on the interest from previous months, leading to a growing debt.
3. Analyze the impact of paying the minimum balance: Paying only the minimum balance prolongs the repayment period, resulting in higher total interest payments and a larger overall debt.
4. Consider the financial consequences: While paying the minimum balance keeps your account in good standing, it does not reduce the principal amount significantly, which can lead to long-term financial strain.
5. Evaluate alternatives: To minimize interest payments and reduce debt faster, aim to pay more than the minimum balance each month or pay off the full balance if possible.