Personal Finance / Unit 5: Credit and Debt
5.4 Minimum Payments
Notes
The minimum payment is the smallest amount you must pay to avoid a late fee. Paying only the minimum keeps you in debt a long time.
- Interest is charged first; the rest of your payment lowers the balance.
- Example: balance $1,000, 24% APR (2% per month). Interest $= 20$. A $30 payment lowers the balance by only $10, to $990.
- The more you pay above the minimum, the faster the balance falls and the less interest you pay in total.
- Paying nothing risks late fees and damage to your credit.
Practice
A $600 balance has 12% APR (1% per month). Interest for the month is:
$600 \times 0.01 = 6$.
Balance $1,000 with 2% monthly interest. You pay $50. What is the new balance after interest and payment?
Interest is $20, so the balance is $1,020 before payment. After paying $50: $970.
Why is paying only the minimum costly?
A small payment leaves the balance growing or shrinking slowly, so you pay more interest.
Ready for more? Take the Unit 5 test.