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We like credit cards. It seems so much easier to make a purchase. We don’t have to wait until we have the money to buy things. We feel like we have the flexibility to pay only the minimum rather than pay the balance each month.

But that’s where credit cards can have an adverse effect on us. While making the minimum payment helps you stay in good standing with the card issuer, there are still ways that credit card debt can affect you:

It takes longer to pay off a credit card when you only make minimum payments.
You potentially pay more in interest over the life of the balance when making only minimum payments instead of larger payments or paying the balance in full.

How Are Payments Calculated?

Not all credit card contracts are the same, and you can find the details of how your minimum payment is calculated in each credit card agreement. Many companies use a percentage of around 3% of the credit card balance to calculate minimum payment. It may be more or less based on the particular card issuer. This does not include any additional fees, such as late payment fees, over limit fees, etc.

How to Calculate Credit Card Payments

There are many useful credit card calculators online, and you can find ours here. But, they don’t tell you how the payments are calculated. Understanding how payments are calculated can help you be a wiser consumer when making a decision with credit cards – whether it’s shopping around for the best credit card, deciding how much to charge on a credit card, or how much to pay each month.

Got a pencil, paper, and calculator? Here we go:

This example assumes a $5,000 balance where the card issuer requires a minimum payment of 3% of the balance, and the interest rate is 12%.

  1. Determine the minimum payment required by the card issuer.
    Example: Your card has a balance of $5,000, and the minimum payment is 3% of the balance.
    Multiply $5,000 by 3% (or 0.03) and the payment is $150.
  2. Next, calculate the interest. When making a credit card payment, it will be split between interest, fees/services charges, and principal. In most cases, interest and fees/service charges are paid first. This means only a portion of your payment will go towards the actual balance (or principal).
    Convert the annual interest rate to a monthly rate by dividing 12 (as there are 12 months in the year). In our example, the rate is 12%, so the monthly rate you’d pay in interest is 1% each month.
    Multiply the monthly rate by the balance: 1% x $5,000 (or 0.01 x $5,000).
    In our example, the amount you are paying in interest is $50.
  3. Determine the Principal Payment. Assuming no other fees, after the interest amount is paid, the remainder will go towards the principal balance.
    Subtract the interest payment from the minimum payment: $150 - $50.
    In our example, this means that $100 of the minimum payment goes towards paying off the card.
    Your new balance is $4,900 (or $5,000 - $100).

    Example 1

    You will use the new balance to repeat steps 1 - 3 each month if no additional charges are made to increase the balance.

Minimum Payment vs. Consistent, Higher Payment

As you may have guessed, if you always pay the minimum payment, as your balance goes down, the payment amount will go down, and the amount that applies to your principal balance goes down. Meaning, as time goes on, it takes longer to pay off the balance than it would if you made a fixed payment amount each month.  This is especially true if you are continuing to make new charges on the card.

Consider these three examples. In example 1, the minimum required amount is being paid each month, and in examples 2 and 3, a higher, fixed amount. (All examples assume the same annual interest rate of 12% and minimum required payment of 3% of the balance.)

In each example, we have shown the first five months of payments. You can use our handy calculator to make your own examples based on what you owe and what you plan to pay.

Example 1: Minimum Payments
It would take 12.83 years (154 months) to pay of the balance if no additional charges are made each month and only the minimum required payment is made.

Example 2

Example 2: Fixed Payments of $150
It would take 3.42 years (41 months) to pay off the balance if no additional charges are made each month and only the minimum required payment is made.

Example 3

 Example 3: Fixed Payments of $250
It would take 1.83 years (22 months) to pay off the balance if no additional charges are made each month and only the minimum required payment is made.

Example 4

This should give a basic understanding of how credit card payments work, why it takes so long to pay credit cards off, and how taking control of the monthly payment can help you pay them off sooner rather than later. Keep in mind that each card issuer is different, so you will need to know the applicable rates, fees, and service charges specific to each card before doing your own calculations.