What the Minimum Payment Actually Costs

The arithmetic of a slowly shrinking balance

At 22%, a $5,000 balance accrues about $92 of interest in the first month. A $100 payment therefore reduces the balance by roughly $8. Next month the interest is nearly the same. The balance does fall, but at a pace set by the gap between the payment and the interest, not by the payment itself.

The example

$5,000 at 22%, $100 a month: 137 payments, $8,678 of interest, 11 years and 5 months. The same balance at $200 a month: 34 payments, $1,750 of interest. Doubling the payment cuts the interest by 80% and the time by 75%.

Where the money goes

Early payments are mostly interest; late payments are mostly principal. On the numbers above, the first twelve payments total $1,200, of which $1,089 is interest. That ratio reverses only in the final third of the schedule.

Questions

Does paying more than the minimum reduce interest?

Yes — every dollar above the minimum goes to principal, which lowers the balance the next interest charge is computed on.

Does the minimum payment change over time?

On most cards the minimum is a percentage of the current balance, so it falls as the balance falls. The calculator accepts either a fixed amount or a percentage of the balance.

Is the APR on my statement the full cost?

It is the contract rate. Fees and add-ons are not included; the real APR calculator covers that separately.