Balance: Enter the credit card's current balance as of today.
Interest Rate: Enter the credit card's current APR as a percentage.
Your Payment: Enter the amount you plan on paying per month.
Min. Payment: Do not enter anything here. The calculator will figure out your credit card's "minimum monthly payment" for you. Credit card issuers use a standard formula for calculating minimum monthly payments, though your credit card may have a higher monthly minimum. The US federal government is trying to get credit card issuers to demand higher minimum monthly payments as a way of easing the nation out of its monstrous credit card debt. Some issuers have complied, others have not, and they all have changed policies at different times for different cardholders. Check your statement each month for any new minimum monthly payment.
Credit Cards and Credit Card Debt Explained
Credit cards are one of the trickiest, and most expensive, forms of financing. With most loans, you get a clear, upfront picture of how much you're going to pay and how long you'll be paying it. But credit card issuers rarely give you such a detailed picture of what your debt will cost. Most people who carry credit card debt are way, way off the mark in their estimate of how long it will take them to pay the debt off.
APR: Annual Percentage Rate
The interest rate on a credit card is referred to as the APR, for annual percentage rate. The APR reflects the fact of compound interest to some extent. The biggest factor in how credit card debt accumulates is compound interest. With a credit card, you don't just pay interest on your balance. You also end up paying interest on the interest of your balance. Like a game of Whack-a-Mole at the video arcade, as you pay down one chunk of your balance, another chunk quickly pops up. Oftentimes the only way to get out of credit card debt is to make dramatic cutbacks in spending for a certain period of time and put every spare penny toward the balance.
If your credit rating changes or if you are late in making payments, the credit card issuer may raise the APR. Many people are unaware of this. They are shocked that when they approach the limit of their credit card, their rate suddenly goes up. The calculator assumes that your APR stays constant. Just keep in mind that the potential for a higher APR in the future is one great reason to pay down credit card debt now.
Credit Card Penalty Fees
Credit cards are also notorious for their penalty fees. Most commonly, penalty fees come as a result of late payments or going over the credit limit. Again, the calculator does not take account of penalty fees. But the fees are a very a good reason to consider reigning in your credit card balance before you risk incurring such a penalty.
Minimum Monthly Payment
Credit cards generally require a "minimum monthly payment," which is just what the name says: the minimum amount you must pay each month. The amount is a percentage of your balance. By paying the minimum monthly payment every month, it will likely take you as much as twenty years or more to pay off the balance completely, assuming you do not add to the balance and just pay off your existing balance.