Assume you owe a large balance on your credit card and only pay the monthly minimum payment equal to 1% of the balance. If the annual interest rate on the credit card is 18%, how many years will it take you to pay off the balance assuming you do not make any additional charges to the card?
A) 7.8 years
B) 5 years
C) You will never pay off the balance.
D) Not enough information is provided to determine the time.

Question

Quizplus · Accepted Answer

Paying only the minimum payment, which is 1% of the balance, when the annual interest rate is 18%, means that the majority of the payment goes towards interest and not the principal amount. The balance decreases very slowly, if at all, leading to a situation where the debt could essentially never be fully paid off due to the compounding interest.

Assume You Owe a Large Balance on Your Credit Card