Calculating Credit Card Interest and Payments


During the 1970s a minimum credit card payment of 5% was common.  Then Andrew Kahr, an industry consultant, became a sort of hero by convincing his clients – the credit card companies – to reduce it to 2%.  He also championed the zero percent introductory rate that we see heavily advertised even today.

The challenge for this week?

Chad and Kate have a credit card balance of $6,500, with an 18% APR and a minimum payment of 2% per month.  If they pay only the minimum payment each month, how long will it take to pay it off?

The CreditCards.com minimum payment calculator revels that, if paying the 2% minimum every month, it will take almost 44 years to pay it off, and they will have paid $17,896.66 in interest.  Of course this assumes no late or missed payment fee, no new purchase, and no interest rate increase for more than four decades.

I can probably think of something else that I would rather do with $18k.  How about you?

From a recent Purdue Federal Credit Union (PFCU) agreement:

“When you receive your billing statement you may pay the full amount due or a lesser amount, but the least you may pay is the minimum payment amount shown on your billing statement. Your minimum payment will be any amount past due or over-the-limit plus the larger of 3% of your new balance or $20.”

In other words, assuming there’s no past due balance and we’re not over the limit, the minimum payment on an initial $6,500 would be $6,500 x .03 = $195.00.

The advertised annual percentage rate (APR) would be 11.5% – 17.5%, “based on your credit worthiness.”

Unfortunately we don’t know what our actual interest rate will be until we already receive the card, and when we feel that magical power surge through our hands.

But let’s assume a 15% APR, then the first month’s interest payment will be $81.25, and the payment applied to the principal is $113.75.

In this scenario, it would still take more than 14 years to pay off the original $6,500 of spending and they would pay more than $4,000 in interest. But they would save more than $13,000 in interest charges compared to the other scenario.

The couple has also saved $6,500, and is exploring savings options to build that to $10,000 for a home down payment within six years.

If you were their very best friend and they asked you for guidance, then what would you say?

One alternative for Chad and Kate would be to pay off the credit card debt with cash on hand, and then begin to save for the home down payment.  For example, $130 saved every month would build to $10,000 in about 6-1/2 years, even at zero percent interest!  If they could save $195.00 then they would reach their goal in just a bit over 4 years.  Note that I do recommend saving for at least a 20% down payment.

From the last that I heard, there are somewhere around 5,000 credit card issuers, but the top four combine to hold more than 50% of the market, in both the number of cards issued and in dollar volume.  If you have a credit card, check to see if it’s in the Consumer Financial Protection Bureau credit card agreement database.

I searched “Citibank NA” and it listed 40 agreements; some of them are clearly labeled, such as “My Best Buy Credit Card“, “My Best Buy MasterCard“, and “SearsCharge PLUS Account“, but others are labeled such as “Agreement 1” or “Agreement 61”.  Two were simply labeled “0”.

If you have a card issued by Citigroup, JPMorgan, Bank of America, Capital One, or another top issuer, then happy hunting!

Best regards,

Kurt Burnett

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February 4, 2016
January 28, 2016


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