Many people want to understand how their credit card payments are calculated. Knowing the specifics can help you make smart decisions and manage your debt. Good debt management starts with understanding how the payment is calculated and how each payment goes toward reducing your debt (or not).
Online credit card calculators provide some helpful numbers, but if they only show you a final dollar amount or “time to pay off the note” figure. You don’t learn where those numbers come from or their calculations. Perhaps you’re considering putting a major purchase on your credit card or strategizing a debt payoff plan. Either way, you’re a wiser consumer if you go behind the numbers.
Fortunately, the process of calculating your payments (and costs) by hand is not too difficult. If you can remember how to multiply—or get a calculator to do it for you—you’ll have everything you need.
The Minimum Payment
Start by figuring out the minimum payment required by your credit card company. That number is typically based on your balance.
Example: Your card issuer requires you to pay 3% of your outstanding loan balance. You owe $7,000 on your credit card. The minimum payment is 3% of $7,000, or $210. To find that answer, multiply $7,000 by .03 (which is the same as 3%—learn more about converting percentages and decimals).
Your card issuer determines your minimum payment, so you may need to ask which number to use. Learn how to find your minimum payment and understand common methods of calculation.
First, the Interest
When you make a payment, your loan balance doesn’t always decrease by the amount you pay. Your balance probably won’t go down by $100 if you make a $100 payment—unless you have a 0% interest loan and no other fees or charges. Each payment you make also goes toward the credit card company’s cut of the interest rate and other loan fees.
To figure out how much goes toward interest, you need another calculation. It is a fairly easy calculation—but there are a few steps involved.
- Find the interest rate that you pay on your card—12% APR, for example.
- Convert that annual rate to a monthly rate by dividing by 12—because there are 12 months in a year—so, in this example, you’d pay 1% per month.
- Multiply the monthly rate by your outstanding balance. As an example, use 1% times a balance of $7,000.
- The answer is how much you’re paying in loan interest—$70 in this example—each month.
The steps above illustrate a simplified monthly interest calculation. However, your card issuer might charge interest daily. If that's the case, the calculation takes more work, but follows a similar process:
- In Step 2, convert to a daily rate by dividing the annual rate by 365 (it's 0.0329%)
- Calculate the daily interest charge ($2.30 in this case)
- Add that charge to your account balance, for a new total of $7,002.30 after the first day
- Repeat the process for each day of the month
Then the Principal
After you pay interest, the remainder of your payment goes toward your debt—known as the “principal” part of your loan or the loan balance. Subtract the interest charges from your total payment to figure out how much principal you pay off in any given month.
In our example, your payment is $210, and the interest charges amount to $70. Subtract 210 - 70 = 140, so you pay off $140 of your loan this month. That brings your loan balance down to $6,860 for next month.
As you might have guessed, you need that number to calculate the next month’s payment. If you do this all by hand, the process is time-consuming, but calculators and spreadsheets can speed the process.
If you pay more than the minimum payment, which is typically a smart move, you pay down your loan balance faster.
The amount that goes toward interest this month is fixed—there’s nothing you can do about it at this point. You can accelerate your debt repayment and pay less interest next month by paying more than the minimum.
Many Months, Many Calculations
You know how to calculate the payment and interest charges for a single month, but how can you calculate over longer periods?
It’s easiest to use a spreadsheet or a hand-built table to see the entire process of paying off your debt. The idea is the same as making an amortization table for a home or auto loan: Each row represents one payment.
It may take a small amount of spreadsheet wizardry, but you can take it slow or start with a template, and you’ll have a valuable tool. With each new row, look back at the loan balance at the end of the previous month (in the row above it). For a sample of how your spreadsheet might look, copy the images in this tutorial.
Variations on the Theme
Now you have a basic understanding of how most credit card payments work, but every card issuer is different, and your card might have different features. With what you’ve already learned, you should be able to figure out how to calculate your own debt payoff with just about any card issuer.
- If your card has an annual fee, add that fee to your loan balance when the fee is charged.
- If your interest rate will change in the future, keep that in mind as you run the numbers and adjust the calculation.
- If you decide to skip a payment (which you probably shouldn’t do) for the holidays, make that month’s payment a zero.
Frequently Asked Questions (FAQs)
Should I pay my credit card in full each month or leave a balance?
You should pay your balance in full each month. If you're only charging things you can afford, this shouldn't be a problem. Leaving a balance won't help your credit score, and it could hurt your credit score if your balance is more than 30% of your credit limit.
How long will it take to pay off my credit card if I make only the minimum payment each month?
This will depend on how your credit card issuer determines your minimum payment, but all issuers are now required to include that information in the statements they send to customers. Check your statement. It should say how long it will take to pay off your balance paying just the minimum amount required each month.
How is a minimum credit card payment calculated?
It is based on your balance and your interest rate. It is typically a percentage of your balance, which could be anywhere from 2% to 4%, depending on your card issuer.