Credit Card Payoff Calculator

Revolving credit has no fixed maturity, which is why payoff cannot be solved with a single amortization formula and has to be simulated month by month. Each cycle the issuer applies a monthly periodic rate equal to the APR divided by twelve, so a 21.99 percent APR charges about 1.8325 percent on the balance; whatever the payment exceeds that interest becomes principal. The critical feature is that the required payment is itself a function of the balance. Most issuers compute the minimum as a small percentage of the balance, commonly 1 to 3 percent, or a floor of roughly 25 to 35 dollars, whichever is larger. As the balance falls the minimum falls with it, so principal reduction decays geometrically and the payoff tail stretches for decades. That feedback loop produces the counterintuitive results this model exposes. On an 8,000 dollar balance at 22 percent with a 2 percent minimum, the first payment of 160 dollars is roughly 147 dollars interest and 13 dollars principal, and total interest can exceed the original balance. A fixed payment breaks the loop, because the interest share shrinks each month while the payment does not. If the monthly payment is ever less than or equal to the balance times the periodic rate, the debt never amortizes at all. Real statements will differ from any simulation: issuers vary in whether minimums include fees, deferred-interest and promotional balances are bucketed separately, and payments above the minimum must by law be applied to the highest-rate balance first.

General-purpose payment cards began as charge cards settled in full each month - Diners Club in 1950, followed by American Express in 1958 - and only became revolving debt when Bank of America mailed roughly 60,000 unsolicited BankAmericard accounts into Fresno, California in September 1958, the experiment that eventually became Visa. Revolving balances made the interest rate the central term of the product, and Congress responded with the Truth in Lending Act of 1968, which required the annual percentage rate to be disclosed in a standard form so borrowers could compare offers. Rates were still capped by state usury laws until the Supreme Court decided Marquette National Bank v. First of Omaha Service Corp. in 1978, holding that a national bank could export the interest rate of its home state. Issuers relocated their card operations accordingly - Citibank moved to South Dakota in 1981, and Delaware followed with similar legislation - and rate ceilings effectively disappeared. Minimum payments drew regulatory attention next: guidance from federal banking regulators in 2003 and 2005 pressed issuers to set minimums that actually amortize principal rather than merely covering interest and fees, and the Credit CARD Act of 2009, effective in 2010, required every statement to display how long minimum-only payments would take and what a three-year payoff would cost. The Federal Reserve has published the average assessed rate on card accounts in its G.19 consumer credit release for decades.