Do you get charged interest if you pay minimum payment?

Understanding Interest Charges on Minimum Credit Card Payments

Maintaining a balance on a credit card involves paying interest charges, which can significantly impact the overall cost of borrowing. While making minimum payments is a common practice, it’s crucial to be aware of the potential consequences.

Impact of Minimum Payments

Making only the minimum payment each month extends the repayment period significantly, often by years. This prolonged repayment timeline allows interest to accrue relentlessly on the remaining balance. As a result, the total interest paid over the life of the loan becomes substantially higher compared to making full or larger payments.

Accumulating Interest

Interest is charged on the outstanding balance of a credit card, including any unpaid minimum payments. As long as a balance remains, interest will continue to accumulate. This means that even if you make minimum payments regularly, the total interest charged will continue to grow.

Example

Let’s consider an example:

• Credit card balance: $5,000
• Minimum payment rate: 2%
• Annual interest rate: 18%

If you make only the minimum payment of $100 each month, it will take you over 6 years to pay off the debt. During this time, you will end up paying approximately $2,500 in interest charges.

In contrast, if you make full payments each month, you will pay off the debt in just over 2 years, incurring only about $500 in interest.

Financial Implications

The potential financial implications of making only minimum payments can be substantial. Higher interest charges not only increase the total cost of borrowing but also reduce your available disposable income. This can make it more challenging to manage other financial obligations or save for future goals.

Conclusion

While making minimum payments may seem like an easy way to manage credit card debt, the long-term consequences can be significant. Interest accrual will continue until the entire balance is settled, leading to higher overall costs. It is advisable to make full or larger payments whenever possible to reduce interest charges and minimize the financial burden associated with credit card debt.