Business & Investing
Sponsored by

Question on CC interest and min. payments

2,262 Views | 18 Replies | Last: 5 yr ago by handle234
62strat
How long do you want to ignore this user?
AG
Let me start by saying I haven't paid a dime in credit card interest in probably 15 years.

I'm sitting here looking at my credit card statement, and amazed at how low the min. payment is. I glanced and see the apr is 18%, or 1.5% a month, yet I calculated the min. payment to be only 1.3% of the balance, which would result in the balance actually growing. Theoretically, I could never pay it off by paying the minimum, which I wouldn't think is even legal for cc companies to do.

Anybody have any insight to that?
Tecolote
How long do you want to ignore this user?
AG
62strat said:

Let me start by saying I haven't paid a dime in credit card interest in probably 15 years.

I'm sitting here looking at my credit card statement, and amazed at how low the min. payment is. I glanced and see the apr is 18%, or 1.5% a month, yet I calculated the min. payment to be only 1.3% of the balance, which would result in the balance actually growing. Theoretically, I could never pay it off by paying the minimum, which I wouldn't think is even legal for cc companies to do.

Anybody have any insight to that?
I also haven't paid a dime in CC interest in over two decades. However, look at your statement - there is a law requiring them to disclose how long it would take to payoff the balance at current interest rate making only the minimum payment. It can't be forever but it will be on the order of 15-20 years.
permabull
How long do you want to ignore this user?
AG
62strat
How long do you want to ignore this user?
AG
To both of you, yes, the chart is there saying how long it will pay off.

But, to use real numbers, my balance is $1880, min. payment is $25, and APR is 18%.

So how does that work? Those numbers result in an increasing balance every month, since interest alone (1.5% month x 1880 = $28) is more than $25. Of course I'm assuming that $25 min. payment remains the same, perhaps it increases over time?

Again, it just caught my attention.

permabull
How long do you want to ignore this user?
AG
kylewhitener
How long do you want to ignore this user?
I think the minimum payment on my card is $25 OR (1% of principal + interest owed), whichever is higher.
In your example, if you paid $25, your next month balance would go down to $1,855 and your interest would be $27.83. So your next balance would be $1,882.83, but your minimum payment would be (.01*1855 + 27.83), or $46.38.

That's my guess anyway.
62strat
How long do you want to ignore this user?
AG
hypeiv said:

what does the chart say as far as months and total payments?

You might be under a promotional interest rate of 0% or something
It says min. payment will take 11 years hah. No promo rate, the card is 2 years old, i checked previous statements, same thing.. min. payment is less than interest only.

obviously the min. payment must go up at some point to cover interest plus some principal.. I'm not willing to try it out, so guess I'll never know
Buck Compton
How long do you want to ignore this user?
AG
Typically, credit card interest is not charged monthly, it is charged at a daily rate and added to the balance (capitalized). The payment will be impacted by number of days in the billing cycle and the carrying value and can definitely change each month. Typically the minimum payment will increase to cover this.

So in this situation:
  • Daily interest charge: 18%/365 days in a year = .049315% per day
  • $1,880 - $25 = $1,855 balance that interest will be charged on

If this was a 30 day billing cycle, assuming no mid-month payments:
  • $1,855 * 1.00049315^30 = $1,882.67, resulting in negative amortization, which is against regulations for credit card repayments if it were to stay that way

My only outstanding questions will be are you sure the APR is still 18%? Was the statement balance actually $1,880, or have more charges hit since your actual statement? Did you round numbers for here?

If everything is correct on here and the statement balance was $1,880, the minimum payment should actually be at least $27.61, and that likely wouldn't even pass the "reasonable time" to payoff test.
62strat
How long do you want to ignore this user?
AG
kylewhitener said:

I think the minimum payment on my card is $25 OR (1% of principal + interest owed), whichever is higher.
In your example, if you paid $25, your next month balance would go down to $1,855 and your interest would be $27.83. So your next balance would be $1,882.83, but your minimum payment would be (.01*1855 + 27.83), or $46.38.

That's my guess anyway.
If that were the formula for this card (a chase visa), the min. payment would be more than $25 for this statement. It would be $18.80 plus ~$27 in interest.

BlackGoldAg2011
How long do you want to ignore this user?
AG
so a few things that will bring those numbers in. first, 18% APR on an interest rate compounded monthly is actually, 1.388843% on a monthly basis. (1.18^(1/12)-1) then, if you assume your first monthly payment is due before interest is calculated, your first interest accrual would be 25.76. So still technically rising, but close enough that my guess would something tied to when the interest actually starts accumulating.
Buck Compton
How long do you want to ignore this user?
AG
62strat said:

kylewhitener said:

I think the minimum payment on my card is $25 OR (1% of principal + interest owed), whichever is higher.
In your example, if you paid $25, your next month balance would go down to $1,855 and your interest would be $27.83. So your next balance would be $1,882.83, but your minimum payment would be (.01*1855 + 27.83), or $46.38.

That's my guess anyway.
If that were the formula for this card (a chase visa), the min. payment would be more than $25 for this statement. It would be $18.80 plus ~$27 in interest.


That formula doesn't kick in until interest starts being charged (you haven't missed a payment or underpaid, so it is +$0)
Buck Compton
How long do you want to ignore this user?
AG
BlackGoldAg2011 said:

so a few things that will bring those numbers in. first, 18% APR on an interest rate compounded monthly is actually, 1.388843% on a monthly basis. (1.18^(1/12)-1) then, if you assume your first monthly payment is due before interest is calculated, your first interest accrual would be 25.76. So still technically rising, but close enough that my guess would something tied to when the interest actually starts accumulating.
You're confusing EAR with an APR. An APR is a stated rate (simple interest rate) that isn't actually the effective interest rate when the daily periodic rate is compounded daily or even monthly.
BlackGoldAg2011
How long do you want to ignore this user?
AG
Buck Compton said:

Typically, credit card interest is not charged monthly, it is charged at a daily rate and added to the balance (capitalized). The payment will be impacted by number of days in the billing cycle and the carrying value and can definitely change each month. Typically the minimum payment will increase to cover this.

So in this situation:
  • Daily interest charge: 18%/365 days in a year = .049315% per day
  • $1,880 - $25 = $1,855 balance that interest will be charged on

If this was a 30 day billing cycle, assuming no mid-month payments:
  • $1,855 * 1.00049315^30 = $1,882.67, resulting in negative amortization, which is against regulations for credit card repayments if it were to stay that way

My only outstanding questions will be are you sure the APR is still 18%? Was the statement balance actually $1,880, or have more charges hit since your actual statement? Did you round numbers for here?

If everything is correct on here and the statement balance was $1,880, the minimum payment should actually be at least $27.61, and that likely wouldn't even pass the "reasonable time" to payoff test.
i didlnt realize CC was daily, but this solves part of the issue. because 18% annual is actually .04443% on a daily basis. with that, are oyu sure your APR is exactly 18% an not 17.6% rounded up, because that would make the balance start decreasing with $25
BlackGoldAg2011
How long do you want to ignore this user?
AG
Buck Compton said:

BlackGoldAg2011 said:

so a few things that will bring those numbers in. first, 18% APR on an interest rate compounded monthly is actually, 1.388843% on a monthly basis. (1.18^(1/12)-1) then, if you assume your first monthly payment is due before interest is calculated, your first interest accrual would be 25.76. So still technically rising, but close enough that my guess would something tied to when the interest actually starts accumulating.
You're confusing EAR with an APR. An APR is a stated rate (simple interest rate) that isn't actually the effective interest rate when the daily periodic rate is compounded daily or even monthly.
yup. sure am, please ignore all my previous comments
62strat
How long do you want to ignore this user?
AG
APR is listed as exactly 17.99% (d), which is daily balance method. New balance is exactly $1887.35, min. payment is exactly $25, 31 days in this particular billing cycle. Yeh i did overlook rate.. can't take 18/12 for a monthly rate since it's done daily.

I'm getting 17.99/365/100, then x 1887.35, then x 30 days. (Is that right?) That equals $28.83, more than min. $25 payment.

As noted above, this is erroneous since no interest is accruing yet. Made me rethink it.. if I pay $25 min payment, then next cycle, interest will kick in, and min payment obviously will go up. Paying $25 before due date is 100% principal paydown. I'd think next month would be $25+interest, so your principal goes down $25 every month, but that would only be 6 years and change to pay off, so that can't be it either.
BlackGoldAg2011
How long do you want to ignore this user?
AG
just thought of another possibility. is part of that $1880 in the last closed billing cycle and part is in the current open billing cycle? if so maybe the interest is only calculated off part of that 1880?
Tecolote
How long do you want to ignore this user?
AG
BlackGoldAg2011 said:

just thought of another possibility. is part of that $1880 in the last closed billing cycle and part is in the current open billing cycle? if so maybe the interest is only calculated off part of that 1880?
If he pays in full every month, then there hasn't been any interest. Looks like OP was projecting out interest for the next cycle. If he let the balance ride, his minimum payment would be more next month.
62strat
How long do you want to ignore this user?
AG
BlackGoldAg2011 said:

just thought of another possibility. is part of that $1880 in the last closed billing cycle and part is in the current open billing cycle? if so maybe the interest is only calculated off part of that 1880?
If I were just looking at account activity and current balance, that might be the case, but I'm looking at a statement. A statement doesn't include charges in the balance that are after the statement close date.


Tecolote
How long do you want to ignore this user?
AG
62strat said:

BlackGoldAg2011 said:

just thought of another possibility. is part of that $1880 in the last closed billing cycle and part is in the current open billing cycle? if so maybe the interest is only calculated off part of that 1880?
If I were just looking at account activity and current balance, that might be the case, but I'm looking at a statement. A statement doesn't include charges in the balance that are after the statement close date.

Then look under the finance charges section - if it says $0 then you're adding in interest is a projection and not an actual charge. Thus, that's why it's not included in your minimum payment.
handle234
How long do you want to ignore this user?
I worked in this part of the credit card company for a few years.

If you pay 100% of your balance every month, you are not paying interest (this seems to be well known), even though you are technically borrowing money from the credit card company for 15-60 days between purchase and payment. The company knows it will always be lending some amount of money at 0% in this situation.

If you paid 100% last month (month 0), but then only pay the minimum this month (month 1), you will not be paying any interest in month 1.

However, if you pay less than the full balance in month 1, the interest will begin to accrue on day 1 of month 2 at the daily interest rate. Then you will see a change in your minimum payment such that it will pay down the principal in month 2.

More generally, in the 2000s the credit card practices (fees, penalties, interest) were so complex and hidden it was difficult for the math guys at my company to keep track of it all. The CARD Act in 2009 restricted a bunch of those bad practices and made things simpler, but not that easy (as seen in this thread).
Refresh
Page 1 of 1
 
×
subscribe Verify your student status
See Subscription Benefits
Trial only available to users who have never subscribed or participated in a previous trial.