How to Calculate Amortization of Credit Cards

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Amortization is an accounting term that refers to the process of slowly paying off a debt over a period of time. There are two basic strategies for the amortization of credit cards: the minimum payment method and the constant payment method. Both methods assume that you will stop using the card for new purchases. As you will see, the minimum payment method is far more expensive and takes far longer than the constant payment method.

Gather the information required to calculate the amortization on your credit cards. You will need your account balance and current interest rate. You will also need the percentage of the balance the credit card issuer uses to determine your minimum payment. These can be found on your credit card bill.

Calculate your monthly periodic interest rate by dividing your annual interest rate by 12. For example, if your annual interest rate is 18.0%, you should divide 18 by 12 to find a monthly periodic interest rate of 1.50%.

Calculate your monthly interest charge by multiplying your monthly periodic rate by your total balance from the previous month. For example, if your balance last month was $5000.00 and your monthly periodic rate is 1.50%, you will owe $75.00 in interest charges.

Calculate your monthly payment by multiplying the total balance on your credit card by the percentage used for the account. For instance, if your minimum payment is set at 2.5% of a balance of $5000, your minimum monthly payment will be $125.00.

Add any interest charges to the balance and subtract from this your minimum payment. Using the above example, this works out to $5000.00 + $75.00 - $125.00 = $4950.00.

Use the ending balance from Step 5 as the "previous balance" to calculate your next month’s interest and minimum payment. Repeat this step for as many months as it takes to amortize, or pay off, the debt completely. For the example given above, it will take approximately 26 years to fully pay off the credit card at a total cost of about $12,112.

Amortize your credit card debt using the constant payment method. This procedure is identical to the minimum payment method with one important exception. Rather than making a different minimum payment each month, you will make a payment of a constant amount. For instance, in the above example you would continue paying $125.00 each month, even though the minimum necessary payment would decrease each month. Using this method, you will completely pay off the debt in about 5 years and 2 months at a total cost of about $7750 (a savings of over $4300).

Tips & Warnings

  • Although the calculations for the amortization of credit cards are not difficult, in practice it can be easier to use one of the many online calculators designed for this purpose. There is a link below to one at bankrate.com that is free to use. Remember that you can often significantly shorten the amortization time with only modest increases in your monthly payments.

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