Going beyond the numbers will make you a more savvy customer.
Many individuals are curious about how credit card payments are determined. You can manage your debt and make wise judgments if you are aware of the details. Understanding how the payment is calculated and how each payment contributes to debt reduction is the first step in effective debt management (or not).
Online credit card calculators offer some valuable data, but they only display the total cost or the “time to pay off the note” amount. You are not made aware of the sources or methods used to calculate such numbers. Maybe you’re thinking of putting a sizable purchase on your credit card or planning a debt repayment strategy. Going beyond the stats will make you a more informed customer in any case.
Fortunately, it’s not too difficult to figure up your payments (and expenses) by hand. You will have all you need if you can recall how to multiply or use a calculator to do it for you.
The Minimum Payment
Determine the minimum payment that your credit card provider requires first. Usually, that sum is determined by your balance.
Example: Your credit card company demands that you pay 3% of your outstanding loan balance. Your credit card balance is $7000. The minimum payment is $210 or three percent of $7,000 due. Multiplying $7,000 by.03, or 3 percent, will give you the answer; find out more about converting percentages and decimals.
You might need to inquire as to which number to use as your card issuer decides your minimum payment. Discover your minimum payment and become familiar with popular calculation techniques.
First, the Interest
Your loan balance doesn’t always go down by the amount you pay when you make a payment. Unless you have a loan with 0% interest and no additional fees or penalties, it’s unlikely that a $100 payment will result in a $100 reduction in your debt. Each payment you make also contributes to the interest rate and other loan fees that are taken by the credit card provider.
You must perform another computation to determine the amount that goes toward interest. There are a few phases in the computation, but it is fairly simple.
- Find the interest rate you pay for your card—for example, 12 percent APR.
- Since there are 12 months in a year, divide the annual rate by 12 to get the monthly rate, which in this case would be 1 percent.
- Multiply your outstanding balance by the monthly rate. Use 1% times a balance of $7,000 as an example.
- The amount of loan interest you pay each month ($70 in this example) is the solution.
The procedures mentioned above show how to calculate monthly interest simply. But your credit card company might tack on interest every day. In that scenario, the calculation requires more effort but proceeds similarly:
- Divide the annual rate by 365 in Step 2 to translate to a daily rate (0.0329 percent).
- Determine the daily interest rate ($2.30 in this example).
- After the first day, add that charge to your account balance for a new total of $7,002.30.
- Every day of the month, carry out the same procedure.
Then the Principal
The balance of your payment is applied to your debt, also referred to as the “principal” portion of your loan or the loan balance, after interest has been paid. To determine how much principal you pay off each month, deduct the interest fees from your total payment.
Your payment in our case is $210, and the interest costs total $70. You pay off $140 of your loan this month by deducting 210 from 70, or 140. Your loan balance for the following month is now $6,860.
You need that figure to determine the payment for the following month, as you would have anticipated. The process takes a lot of time if you do it all by hand, but calculators and spreadsheets can make it go faster.
You can accelerate the repayment of your loan debt by paying more than the minimum payment, which is usually a wise choice.
You currently have no control over the amount that will be applied to interest this month; it is a predetermined amount. By contributing more than the required minimum, you might speed up debt repayment and pay less interest the following month.
Many Months, Many Calculations
You are aware of how to figure out the payment and interest costs for a single month, but how do you figure out larger time frames?
To see the full debt repayment process, it is most convenient to utilize a spreadsheet or a manually built table. Making an amortization table for a home or car loan works similarly in that each row represents a single payment.
It could only require a little bit of spreadsheet magic, but you can go slowly or use a template to get started, and you’ll have a useful tool. Review the loan balance from the previous month’s end for each new row (in the row above it). Copy the photos in this guide to get an example of how your spreadsheet might appear.
Variations on the Theme
Now that you know the basics of credit card payments, keep in mind that each card issuer is unique and that your card may have additional capabilities. You should be able to calculate your own debt payoff with just about any credit card company using what you’ve already learned.
- If your card has an annual fee, when the fee is assessed, add it to your loan balance.
- When you run the calculations and modify the formula, take in mind whether your interest rate will alter in the future.
- Make the payment for that month a zero if you choose to skip a payment (which you shouldn’t do anyhow) in order to celebrate the holidays.
Frequently Asked Questions (FAQs)
Should I keep a balance on my credit card or pay it off in full each month?
Every month, you ought to make the whole balance payment. This shouldn’t be an issue if you just charge what you can afford. Leaving a charge won’t raise your credit score, and if your balance exceeds 30% of your credit limit, it can even lower it.
If I only pay the minimum amount due on my credit card each month, how long will it take me to pay it off?
Your minimum payment will be determined by your credit card issuer, but all issuers are now obligated to publish that information in the statements they send to customers. Look through your statement. It must specify how long it will take you to pay off your loan if you only make the bare minimum payment each month.
How is the minimum payment on a credit card determined?
Your balance and interest rate are taken into account. It is often expressed as a percentage of your outstanding debt, which can range from 2 to 4 percent depending on the card issuer.