Credit cards are by far one of the more complicated financial innovations in terms of personal finance. Ignoring the complexities of cash back and rewards points, as well as the benefits of a grace period on the first month’s interest, the way in which credit cards compound interest is slightly different than the way in which a normal loan or revolving line of credit would operate.
As such, the equation for calculating how much time you have left on your credit card at a certain payment amount is a fairly complex beast. That being said, the underlying assumptions of the equation should be enough on its own to motivate us towards doing the math, and finding out how to get rid of these balances as soon as possible.
Credit cards differ from personal loans because of the way in which they compound interest on top of the full monthly balance that was carried, even if a payment has been made on the loan amount. This means that the amount of interest that we are paying on a credit card will always be higher than on even a comparable revolving line of credit. The addition of interest upon payments also results in a somewhat different payment schedule for the loan, as well as a period of latency between when we think we’ve paid off a card, and when we have actually paid off the card. Continue reading