Question

Pretend you make $500 worth of purchases on your credit card, your bill arrives saying your minimum payment due is $20, and you pay that amount before the due date. Describe how credit card interest works and what you can expect to happen next

Answer 1

Explanation:

One may ask: what is a credit card? In simple words, a credit card is a payment instrument (plastic card) that allows the cardholder to spend money they don't personally own in their account.

Hence, A typical credit card statement would inform me that I made a purchase worth $500, stating

1. The Payment Due Date: For example, it may be written that I must have made the credit balance by 31/12/XX. (Note, Failure to do so would in most cases lead to accruing of interest)
2. The Minimum payment due: In this case, the $20 signifies a minimum payment that is significant enough to be recorded till the entire $500 balance is covered. However, it is not intended that only that amount be paid each month. If it were to be it would take me 25 months or 2 years 1 month ($500/$20) to complete the balance; which is not the best option likely considering the accrued interest to be paid.