Understanding Credit Card Amortization
Unlike a fixed-term loan like a mortgage, a credit card amortization calculator works on a revolving balance. Amortization in this context refers to the process of reducing your debt through regular, fixed payments. Each payment is split between the interest charged by the bank and the reduction of your actual debt (the principal).
Repayment Methodology
Credit card interest is typically calculated daily, but for monthly planning, the formula used is:
Interest = (Balance × (APR / 100)) / 12
As you pay down the balance, the interest portion of your payment decreases, allowing more of your money to go toward the principal in the following months. This creates an "accelerating" effect on your debt reduction.
A Numerical Example
If you have a $1,000 balance at 24% APR and pay $100 per month:
- Month 1: Interest is $20 ($1,000 * 0.02). Principal reduction is $80. Remaining balance: $920.
- Month 2: Interest is $18.40 ($920 * 0.02). Principal reduction is $81.60. Remaining balance: $838.40.
Notice how in the second month, your principal reduction increased even though your payment remained the same!