Example: Input an outstanding balance of $1,000 and an annual rate of 16%.
Looking at row ‘A’ we see that it takes 15.5 years and 2,329.27 dollars to pay this off if you just pay the minimum amount each month. In this case, the minimum amount starts off at $20 but slowly decreases with each passing month. For example, the next month’s minimum payment would be 19.87. This payment reduction is very small, but as can be seen, it seriously increases the amount of time it takes to pay off the balance.

If instead you constantly pay the first minimum payment amount of $20 (row ‘B’), the balance gets paid off in 6.83 years at a total cost of 1,658.74 – a huge reduction in the amount of time and money.

To use this for your own credit card calculations, you may input other values in rows ‘C’ and ‘D’.
(These are usually found in the boring small print on the back of your credit card bill).

One nice feature of this calculator is that you can input your own payment amounts to see how quickly you can pay off a balance.
Again, let’s use the 1,000 dollars and 16 per cent rate.
However, this time, instead of clicking on ‘CALCULATE’, click on ‘Enter A Monthly Payment’ and then enter 100 in the pop-up window.
Then you see in row ‘B’ that 100 dollars per month will pay off the entire balance in .83 years and will only cost $79.44 in interest.

Credit Cards are handy for many reasons:

• You delay bill payment up to 30 days and without interest.
• They are more readily accepted than checks.
• More convenient and less risk than carrying large amounts of cash.

  However Credit Cards can be risky because:

• Late payment charges are very expensive (about $30 for just one late payment).
• It is easy to “spend” money you really don’t have.
• Unpaid balances become a problem due to the high interest rates.
• Failure to pay off a credit card bill will result in a bad credit rating.

A bad credit rating can prevent you from opening a checking account, renting an apartment, obtaining a mortgage, or renting a car. You might be able to get a car loan but the interest rates will be much higher and you might be subject to some very expensive dealer’s fees. It could prevent you from getting a job especially in the financial sector. Yes, employers can run credit checks and they take a bad credit rating as a sign of irresponsibility.

Important: To avoid running up an unpayable credit card debt, you should always pay the outstanding balance in full every month.
If this cannot be done, pay off your balance by the most money you can afford each month.
Paying just the minimum amount each month can be a “trap” and this calculator demonstrates why.

Let’s suppose your credit card balance is $1,000. If you wanted to pay all of that debt, you’d just pay $1,000. There would be no interest, no minimum payments to make, no late charges, etc.

However, if you can’t pay the balance in just one payment, you might decide (as most people do) on just making a minimum payment.
Calculating this payment involves 3 factors:
1) Minimum Payment Percentage
2) Annual Percentage Rate
3) Smallest Minimum Payment

1) The Minimum Payment Percentage varies depending on the credit card company, but usually it’s between 2% and 4% of the outstanding balance.
If it is 2% then for $1,000 it is $20.

2) Annual Credit Card Percentage Rates vary from one company to another but they average about 16%.
Since you will be delaying payment by at least one month, your balance accumulates interest rate charges.
If your annual interest rate is 16% then the monthly rate is 16% divided by 12 or 1.33%.

So, for next month, the $1,000 balance has increased by 1.33% and has decreased by the $20 payment.
or New Balance = $1,000 plus (1,000 x .013333) minus $20 which equals 993.33.

We can repeat steps 1 and 2 in order to calculate the next minimum payment:
2% of 993.33 = 19.87 and next month’s starting balance equals
993.33 + (993.33 x .013333) -19.87 or $986.71

3) If we continued this procedure for a century (or 1,200 payments), the balance would still not be paid off and would be .33 cents.
The Smallest Minimum Payment was brought into practice by credit card companies so customers would not literally be paying off a credit card balance forever. Again there is variation on the amount of this payment but it is rarely below $10.
In our example above, when we get to payment #104 (8.67 years), the minimum payment falls below $10.
Continuing the calculations at a constant monthly payment of $10, the balance finally gets paid off in 186 months or 15 and a half years.