How much of your credit card payment goes to pay principal? from Scripps Howard News Service
Want to know how much of your credit card payment will go toward reducing the principal balance? For many credit cards that calculate payments based on average daily balance, the formula is similar.
- Begin by determining your balance at the close of the billing cycle. If you don 't know it, your billing statement should show the amount.
Multiply this number by.02, or 2 percent. In many cases, the result will be the minimum payment established by the credit card company. Some department stores use 3 percent for this calculation.
If your end-of-month balance is $2,000, this formula would put your minimum payment at $40.
- Divide the annual percentage rate applied to your card by 12 (the number of months in a year). If your card carries an 18-percent rate, for example, the answer would be 1.5 percent for a month.
- Next, determine your average daily balance. If you've made purchases during the month, an easy way to get this number is to check your monthly statement.
- Multiply your average daily balance by the monthly rate. (Remember, this is 1.5 percent, or 0.015, if your APR is 18 percent.) The result will reveal the amount paid in interest for the month.
Multiply $2,000 by 0.015, for example, and you'll get $30. So, if your minimum payment is only $40, you will have paid only $10 toward the principal.
Then the process begins again, with next month's balance still a hefty $1,990.
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