Terms vary widely, but most credit cards offer some riff on the same Faustian bargain: Spend money you don’t have and pay it back in 30 days, or else get charged double-digit interest on the outstanding balance. If you fail to make even the minimum payment, you will be subject to additional fees right on top of the exorbitant APR. Penalties may even include a triggering of higher penalty APRs, passing on the punitive costs to include some percentage of your entire balance.
If you’re making your minimum payment, you don’t have to worry about these punitive measures, but if you’re only making your minimum payment then you’re still going to be grappling with compounding APRs. Most minimum payments are low enough that a significant portion of your balance is left over to trigger this non-penalty interest. Therein lies the danger: An inexperienced credit card user might feel like they are following all the rules by making minimum payments, and while that’s technically true, they’ll still be racking up massive interest charges month to month. Since the added interest rates increase the overall amount you will need to pay off, getting out of debt can become a much longer process. Plus, as your credit card balance increases so does your credit utilization ratio, which can have a significant impact on your credit score, and not necessarily in a good way.