Credit Cards 101: The Minimum Payment Trap

What your kid learns

• The parts of a statement

  A statement comes once a month. It shows your balance, which is what you owe. It also shows the minimum payment and the due date.

• Pay in full, skip interest

  Pay the whole balance by the due date, and there’s usually no interest. Pay only the minimum, and interest grows on what’s left.

• A limit isn’t money you have

  A credit limit is the most you can borrow. It isn’t income. Late payments bring fees. The law also sets rules for young adults getting their own card.

• When money is tight

  Lots of families carry a balance when money is tight. That’s not a kid’s job to fix. Interest is why it costs more, and there are ways to pay it down.

The story: Reading a pretend statement

Jade reads a pretend credit card statement and compares paying the minimum with paying more.

1. Helper: Jade is reading a pretend credit card statement.
2. Jade: Balance: $600. Minimum payment: just $16. That seems easy.
3. Helper: At a pretend 20% APR, paying the minimum takes over 5 years.
4. Jade: Five years for $600? How much extra is that?
5. Helper: About $390 in interest. Pay $50 a month instead, and it’s gone in about 14 months.
6. Jade: And if the whole balance is paid by the due date?
7. Helper: Then there’s usually no interest at all. Paying in full skips the interest.

The game: Minimum vs full

Start with a pretend $600 balance. Slide the balance or the pretend APR. See how long paying only the minimum takes.

Games use pretend money and work with taps or a keyboard. Nothing is timed.

New words

credit limit

the most you can borrow on a card

minimum payment

the smallest amount you can pay this month without a late fee

grace period

the time before interest starts, when you pay in full

APR

the yearly interest rate on borrowing

Also called: annual percentage rate

Questions at the end

• You pay only the minimum each month. What happens?
• You pay the full balance by the due date. What usually happens?
• A card has a $1,000 credit limit. What is that?
• What can a late payment bring?
• A pretend card has a $100 balance at a pretend 12% APR. About how much interest builds in one month?

Remember this

Paying in full skips the interest.

Talk about it

Why does a card statement show what happens if you pay only the minimum?

Try it at home: Find the minimum-payment box

1. With a grown-up’s OK, look at a credit card statement. They can cover the amounts.
2. Find the balance, the minimum payment and the due date.
3. Find the box that says what happens if you pay only the minimum.

No statement at home? Use Jade’s pretend one from the story: a $600 balance and a $16 minimum.

For grown-ups: live facts

• Card rules for people under 21 and the minimum-payment warning (CARD Act)

  Source: CFPB(opens in a new tab)

• Average credit card interest rate

  Source: Federal Reserve (G.19)(opens in a new tab)

School standards

• Grades 6–8
• National Standards for Personal Financial Education: Managing Credit
• Common Core Math 7.RP.A.3