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💳 Credit & Debt · Lesson 4 of 10 · 8 min

APR & The Minimum Payment Trap

🐌 The 'minimum payment' box on your statement is the most expensive suggestion in personal finance. Pay only that, and a $5,000 balance can take over a decade to clear and cost more in interest than the original purchases. It's quicksand with a friendly font.

💡 Key idea

Minimum payments are mostly interest — paying only them can stretch a balance for 10+ years and double its cost. Always pay more.

🧠 Why it matters

APR (Annual Percentage Rate) is the yearly cost of borrowing. On a credit card, interest is charged on your balance and COMPOUNDS — you pay interest on your interest. The MINIMUM PAYMENT is deliberately tiny (often ~2–3% of the balance), mostly covering interest with barely any principal. Paying only the minimum keeps you in debt for years and can multiply what you owe. The fix: always pay MORE than the minimum — ideally the full balance — and attack the highest-APR debt first.

🌍 In the real world

💡 On a $5,000 balance at 22% APR, minimum-only payments can take 15+ years and cost thousands in interest — you'd pay for that TV several times over. Doubling the payment can cut years and thousands off. The minimum is designed for the bank's benefit, not yours.

📌 Takeaways

  • APR is the yearly cost of borrowing; card interest compounds
  • Minimums are mostly interest — they keep you in debt for years
  • Always pay more than the minimum; kill high-APR debt first
⛓️Try it: Debt payoff calculator: snowball vs avalanche →

📖 Terms in this lesson

APR: Annual percentage rate: the yearly cost of borrowing, the number to compare loans and cards by.

Minimum payment: The smallest amount a card lets you pay each month; paying only that keeps you in debt for years.

✅ Test yourself

Why is paying only the minimum so costly?
  1. It isn't
  2. It's mostly interest, so debt lingers for years and multiplies
  3. It pays off debt fastest
  4. It lowers your APR

Answer: B · It's mostly interest, so debt lingers for years and multiplies

Minimums barely touch principal, so the balance — and compounding interest — drags on for years.

What does APR measure?
  1. Your credit score
  2. The yearly cost of borrowing
  3. Your minimum payment
  4. Rewards earned

Answer: B · The yearly cost of borrowing

APR (Annual Percentage Rate) is the annualized cost of the money you borrow.

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