Question

from the statements below, identify the way or ways in which making only minimum monthly payments on a long-term credit purchase can be a disadvantage.

i. it is illegal to make only the minimum payments for more than one year.
ii. repeatedly making minimum payments harms your credit score.
iii. the total cost is higher if the length of the debt is longer.

a. i and ii
b. ii only
c. i and iii
d. ii and iii

Explanation:

Analyze Statement I

Using the Credit Card Minimum Payment knowledge point
Making only minimum monthly payments on a credit card or long-term credit purchase is a completely legal contractual option provided by lenders, so Statement I is false.

Analyze Statement II

Using the Credit Score Impact knowledge point
Paying only the minimum keeps the outstanding balance high, which increases the credit utilization ratio and consequently lowers the credit score, so Statement II is true.

Analyze Statement III

Using the Credit Card Minimum Payment knowledge point
Paying only the minimum extends the repayment period, allowing interest to compound over a longer duration and significantly increasing the total interest paid, so Statement III is true.

Determine the correct option

Combining the analysis, Statements II and III are correct disadvantages, which corresponds to option d.

Answer:

• a. I and II
• b. II only
• c. I and III
• d. II and III (Correct answer)