Calculate Your Monthly Payment to Set Limits on Spending
There are many tools online that are useful for calculating monthly payment on credit cards but you can do it without a calculator if you have some basic information about your credit card account.
How Minimal is the Minimum Payment?
Changes in how lenders calculate your monthly credit card payment have been mainly due to the percentage of debt balance you are required to pay each month.
Oddly, the most damaging change to consumers was made quietly in 2008 and was not mentioned on financial blogs or news sites at all.
The focus at the time was on a failing economy and credit card lenders took advantage of the lack of attention.
Through the 80's and 90's it was common for credit lenders to set a minimum payment amount that was as low as 1% of the balance due.
We became accustomed to having monthly statement with very low payments due and few of us stopped to ask how long it would take to pay off our debt by paying such small amounts each month.
Credit card debt began to gain notice as a financial problem for consumers in the early 2000's. Financial advisers and writers began educating the public on the problem of paying minimal amount monthly on credit card debt.
Some lenders were found to be charging less than 1% of the balance due on the account and then tacking on the various fees and interest rates to arrive at a minimum payment due.
Regulatory agencies and legislators demanded a higher percentage of the balance be paid off each month. In 2005-6, consumers were often shocked to find the minimum payment on each of their credit cards had doubled.
The lenders were using 3-4% of the balance owed as the basis for monthly payments. As is often the case, the regulators new restrictions were followed but had unexpected consequences on the public.
The Wave of Bankruptcy
Bankruptcies due to credit debt quickly began to rise as consumers with multiple credit cards found themselves unable to pay the much high minimum payments each month.
This would have been a crisis talked about in the media but was overshadowed by the economic crisis that was occurring.
Lenders struggled as the economy worsened. High default rates on credit debt led to massive write-offs in the industry. Consumers slowed their use of credit cards and lenders needed to keep adding new accounts.
In 2008, many top lending banks quietly lowered the percentage of balance for minimum payments once again. Consumers didn't notice a difference as interest rates on credit cards had risen to new heights.
The minimum payments didn't change but the majority of each monthly payment was interest and very little was paid to the debt balance.
If you owed $5000 on a credit card with a 12% interest rate, a minimum payment based on 3% of the debt would be $150 per month. You would pay on that debt for 155 months and pay $2,361 in total interest.
If you owed the same $5000 with a 23% interest rate, a minimum payment based on 1% of the debt would be $145 per month. It would take 283 months to pay off that $5000 balance and you would pay $8,929 in interest charges.
APR - The All Important Number
Credit card interest rates have been increasing in recent years. The APR charged on credit accounts is not influenced by low interest rates for other loans today. Lenders charge an interest rate meant to maintain profitability on credit cards.
The new laws that limited the ability of a lender to arbitrarily raise your interest rate gave a one year window of opportunity for lenders to increase rates across the board.
That is exactly what credit card issuing banks did. There is a good chance the interest rate on your credit card today is almost double what it was five years ago even though you have a decent credit rating.
Low rates today are reserved for people with stellar credit and everyone else pays a high cost for the privilege of using credit cards.
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If I calculate my monthly payments, it's not enough to know what the APR is for the account. I also need to know what percentage of the balance the lender is charging to the minimum payment each month.
Many banks are returning to 2-3% of the balance plus interest as a monthly minimum payment. To calculate my monthly payment, I can read all the fine print the lender supplies for my account.
I can pick up the phone and call and simply ask what percent of the balance is included in the minimum monthly payment.
With the correct APR and balance percentage, you can use an online payment calculator and arrive at a monthly payment amount. This is a good process to follow if you are considering purchasing a high cost item with your credit card.