Chapter P2, Problem 3RQ

To determine

The reason why it is a bad idea to make only minimum payments on the credit card.

Explanation of Solution

If someone makes only minimum payments on a credit card, then there are more chances to pay high interest. This is because if someone has more money each month but not paying the payment original balance, then the debt will go for much longer.

It happens because only a small proportion of the payment is applied to the credit card’s principal balance and the remaining takes accrued interest as well as fees. Also, it increases the cost of payment.

Therefore, it is generally a bad idea to make only minimum payments on a credit card as it will take the person longer to pay off the balance and the creditor or financial institution will charge interest continues until the full balance is paid off.

Economics Concept Introduction

Introduction: A credit card refers to an instrument that is used by people to transact instantly based on credit which is independent of a person’s account balance.