You will be able to explain the revolving balance trap and how long a minimum-only plan takes to clear a balance.
After the December surprise in lesson 2.1, Jun Hao stopped using the card for new spending. He still owed about S$3,000 once January's charges were added. His statement showed a minimum payment of around S$92, which felt manageable, so he set a reminder and paid exactly that each month. A year later he looked at the balance and it had barely moved.
He had not done anything wrong in the sense of missing a payment. His account was in good standing the whole time. He had fallen into what is often called the revolving balance trap, and it is built into how the minimum payment works.
Every card statement shows a minimum payment: the smallest amount you must pay by the due date to keep the account in good standing. Pay at least that and there is no late fee, and your repayment record shows the month as paid on time.
That is all the minimum is designed to do. It keeps the account current. It is not set so that your balance falls quickly, and nobody at the bank has worked out that paying it will clear your debt in a sensible time. On many cards the minimum is a small percentage of the balance, with a floor in dollars, so it shrinks as the balance shrinks and the debt tails off very slowly.
Your card's terms and conditions say exactly how your own minimum is calculated. Some cards use a percentage of the statement balance or a fixed sum, whichever is higher. Others add the month's interest and fees to a percentage. Find the rule for your card before you model anything, because the answer depends heavily on it.
Here is Jun Hao's balance with example terms. The rate is 26% a year, charged monthly, and the minimum is 3% of the statement balance or S$50, whichever is higher. Both figures are made up for the illustration.
In the first month, interest on S$3,000 is S$3,000 times 26% divided by 12, which is S$65. The statement balance becomes S$3,065, and the minimum is 3% of that, about S$91.95. Of his S$91.95, S$65 goes to interest and only about S$27 reduces what he owes. Roughly 70% of his first payment pays for the use of the money and does nothing to reduce the debt.
The next month is almost the same. The balance is a little lower, so the interest is a little lower, but so is the minimum, because it is a percentage of the balance. The share going to interest barely changes. Over the first twelve months, Jun Hao pays about S$1,050 in total. Around S$743 of that is interest, and his balance is still about S$2,692.
Keep going and the numbers get worse. On these example terms, paying only the minimum takes 125 months to clear S$3,000. That is more than ten years. The total interest comes to about S$4,532, more than the original balance, so he would repay about S$7,532 for S$3,000 of spending.
For most of that time the minimum keeps falling with the balance, and it reaches the S$50 floor only in about the sixth year. From then on, the fixed S$50 starts to make faster progress, but by then most of the cost has already been paid.
Change the terms and the answer changes. A higher percentage clears the balance faster. A rule that adds interest plus a small percentage behaves differently again. The point that survives every version is the same: minimum payments are built to keep the account current, and at card interest rates that is a slow and expensive way to repay.
The first part is the maths you have just seen. The second is behaviour. A small minimum payment makes a large balance feel affordable, so people keep spending on the card while paying the minimum, and the balance stays where it is or grows. Lesson 2.1, How the interest-free period works and how you lose it, explained that new spending while a balance remains is charged interest from day one, which adds to the problem.
Paying more than the minimum, even a fixed amount a little above it, makes a large difference. Lesson 2.4, Model a minimum-payment balance in a spreadsheet, puts numbers on that by comparing the minimum with a fixed payment and a twelve-month plan. For now it is enough to see that every dollar above the minimum goes straight to the balance, because the interest has already been covered.
You can estimate how long minimums would take with nothing more than a calculator and patience, month by month. Start with the balance, add a month's interest, work out the minimum from your card's rule, subtract it, and repeat. A few months by hand shows you the pattern, and a spreadsheet does the rest in lesson 2.4.
Before that, find your own card's minimum payment rule in its terms. Then use it on the same S$3,000 balance Jun Hao carried and see how close your answer comes to his ten years.
Using your card's minimum payment rule, estimate how many months a S$3,000 balance would take to clear on minimum payments only.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).