QuestionAugust 6, 2025

Tuesday: Credit You have a credit card with a 1,000 balance and a 20% annual interest rate. If you only make the minimum payment of 25 per month, what could be the long-term consequence of this habit? Student Response: __

Tuesday: Credit You have a credit card with a 1,000 balance and a 20% annual interest rate. If you only make the minimum payment of 25 per month, what could be the long-term consequence of this habit? Student Response: __
Tuesday: Credit
You have a credit card with a 1,000 balance and a 20%  annual interest rate.
If you only make the minimum payment of 25 per month, what could be the long-term consequence
of this habit?
Student Response: __

Solution
4.3(278 votes)

Answer

The long-term consequence is that it will take many years to pay off the balance, and you will pay a substantial amount in interest. Explanation 1. Calculate Monthly Interest Rate The annual interest rate is 20\%, so the monthly interest rate is \frac{20}{12}\% = \frac{5}{3}\% or approximately 0.0167. 2. Calculate Monthly Interest Charge Multiply the balance by the monthly interest rate: 1000 \times 0.0167 = \16.70. 3. Determine Impact of Minimum Payment Subtract the interest charge from the minimum payment: 25 - 16.70 = \8.30. This amount reduces the principal. 4. Analyze Long-term Consequence Since only 8.30 reduces the principal each month, it will take a long time to pay off the debt, and you will pay significant interest over time.

Explanation

1. Calculate Monthly Interest Rate<br /> The annual interest rate is $20\%$, so the monthly interest rate is $\frac{20}{12}\% = \frac{5}{3}\%$ or approximately $0.0167$.<br /><br />2. Calculate Monthly Interest Charge<br /> Multiply the balance by the monthly interest rate: $1000 \times 0.0167 = \$16.70$.<br /><br />3. Determine Impact of Minimum Payment<br /> Subtract the interest charge from the minimum payment: $25 - 16.70 = \$8.30$. This amount reduces the principal.<br /><br />4. Analyze Long-term Consequence<br /> Since only $8.30$ reduces the principal each month, it will take a long time to pay off the debt, and you will pay significant interest over time.
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