Credit Card Debt Calculation, All about Credit Card Debt in Canada

What is Credit Card Debt?

Credit card debt is an unsecured debt that is acquired through credit card loans. You can acquire this debt when you open several credit card accounts that involve different terms and credit limits. Because of the revolving account, you can potentially accumulate credit if you’re using your credit card unwisely.

When making big purchases and loans through your credit, you must first consider your capacity of paying for it. As you enjoy the luxury of using your credit card, you might not anticipate the burden at stake since your credit will remain open indefinitely. Also, good habits in spending can prevent this from happening.

How to Calculate Credit Card Payments & Costs

Knowledge and understanding of the process of credit card payments will help you avoid credit card debt. This includes the calculation of payment and how your payment diminishes your debt.

Fortunately, the method of determining your adjustments and costs is not that complicated. If you know how to multiply numbers, you can surely get the calculation right.

The Minimum Payment

First, you have to figure out the minimum payment is indicated by your credit card issuer. This will be calculated based on your balance. Your card issuer will determine the minimum payment, so you need to adhere to the requirements stipulated to your account.

Example: if you are required to pay 3% of your loan balance amounting to $10,000, your minimum payment will be $300.

The Interest

Monthly Interest Rate

To estimate the value that goes to your interest, you can get an idea through these steps:

1. Determine the interest rate that you’re paying (24% APR, for example)
2. Convert that yearly rate to a monthly rate by dividing by 12 since there are 12 months in a year. ( in this case, your annual rate is 2%)
3. Multiply the monthly rate by your balance (in this case, 2% multiplied by $10,000)
4. The answer is the amount that you’re spending on interest ($200 in this case)

Daily Interest Rate

However, if in case your card issuer puts on a daily interest (rather than the monthly calculation shown above), the calculation will be as follows:

1. Determine the interest rate that you’re paying (24% APR, for example)
2. Convert it to a daily rate by dividing the annual rate by 365 (in this case its 0.065%)
3. Calculate the daily interest charge ($6.50 in this case)
4. Add that charge to your account balance, for a new total of $10,006.5 after the first day
5. Simply repeat the method each day of the month

Then the Principal

After paying the interest, the balance of your payment goes to your loan, which is the principal. So, you can just simply subtract the interest charges from the total payment that you made, and the answer will be the amount of principal that you’re paying in a given month.

Moreover, if you’re smart enough to pay more than the minimum, you can reduce your loan balance more quickly. This is because the amount that is paid to your interest each month is fixed and cannot be adjusted. Hence, paying more than the minimum allows you to spend less on interest in the following month.

Many Months, Many Calculations

For a longer duration of loan terms, it is best to layout the process in a spreadsheet or a hand-built table and easier if you have an online calculator. The approach is the same as making an amortization chart with each row indicating one payment. This way your calculation will run in instant for as long as you make use of the available formula.

Variations on the Theme

Since you have the basic foundation on how credit card debt is calculated, you can now easily calculate your payoff. This is regardless of the differences that each card issuer has like the following:

• If your card comes with a yearly fee, add that amount to your loan balance.
• Eventually, your interest rate may change, make sure to adjust the calculation when it does.
• If you skip a payment, adjust the month’s payments to zero.

Most Effective Ways to Get Out of Debt

• Pay More than the Minimum
• Spend Less Than You Plan to Spend
• Pay Off Your Most Expensive Debts First
• Buy a Quality Used Car Rather than a New One
• Consider Becoming a One Car Household
• Reduce Your Grocery Bill
• Get a Second Job and Pay Down Your Debt Aggressively
• Track Your Spending and Identify Areas to Cut Back
• Get a Consolidation Loan