Formula for Calculating Amortization for Credit Card Debt

by Philippe Lanctot
You need a disciplined plan to get out of credit card debt.

With interest rates typically much higher than interest rates for secured debt such as mortgages and car loans, you may want to make paying off your credit cards a priority. Your ability to calculate the monthly payment required to pay off your debts may help you get your credit card debt under control.

Formula

Calculate the monthly payment required to pay off your credit debt with the formula: CCB / [1 - (1/(1+i/12)^(n*12)] / (i/12)], where CCB is your credit card balance, i is your annual credit card interest rate and n is the number of years in which you want to pay off your credit card. If you owe $10,000 on a credit card with a 19.5 percent interest rate and you wish to pay it off in 3 years, the required monthly payment would be $10,000 / [1-(1/(1+0.195/12)^(3*12)] / (0.195/12)] = $10,000 / [1-1/(1.01625)^36] / 0.01625 = $369.09.

Total Interest

Calculate the total interest you will pay over the period it will take you to pay off the debt by using: (Payment * n * 12) - CCB, where Payment is the monthly payment required to pay off the debt, n is the number of years in which you want to repay the debt and CCB is your current credit card balance. Paying off a $10,000 credit card debt at 19.5 percent interest with a monthly payment of $369.09 over 3 years would result in total interest of ($369.09 * 3 * 12) - $10,000 = $3,287.24.

Amortization Table

You can create an amortization table to track your credit card debt as you make regular payments every month. Start at month(0) with your current credit card balance. For month(1) your interest charge will be Interest(1) = i / 12 * CCB(0), where i equals your credit card annual interest rate and CCB(0) is your current credit card balance. Your credit card principal repaid will be Principal(1) = Payment - Interest(1), and your new credit card balance in month(1) will be CCB(1) = CCB(0) – Principal(1). A $10,000 credit card balance at 19.5 percent interest will generate an interest charge of 0.195 / 12 * $10,000 = $162.50. Principal repaid will equal $369.09 - $162.50 = $206.59. Your new credit card balance will be $10,000 - $206.59 = $9,793.41. Reoeat these steps for each month thereafter.

Additional Spending

If you plan on adding charges to your credit card every month, there is an easy way to factor them in your calculations. Since the charges are made every month, add them to the amount of the required payment you calculated to pay off your current credit card debt. If you need to pay $369.09 every month to erase a credit card debt of $10,000 in three years and you plan to charge $200 per month on your credit card on an ongoing basis, then your monthly payment will be $369.09 + $200 = $569.09.

About the Author

Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.

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