What Is Credit Card Amortization?

Credit card amortization is the process by which consumers using credit cards attempt to lessen and eventually eliminate the money owed to the companies by making payments. In doing so, they must pay back not only the principal, which is the money they have spent using the card, but also the interest on those payments. The interest is generally determined by a annual percentage rate, or APR, which is then compounded monthly against the principal still owed. As more money is paid by the consumer to the credit card company, the principles of credit card amortization show that there will be less interest owed each payment if the card is not being used.

When someone is given a credit card, he or she has essentially been given the right to take out a loan from the credit card company. Every time the consumer uses the credit card, he or she is borrowing money that must be repaid. As compensation for the risk that the money might not be repaid, the credit card company charges interest. Credit card amortization occurs when the consumer makes monthly payments to reduce the amount owed to the credit card company both in terms of the interest and the principal.

One of the main factors that affect credit card amortization is the annual percentage rate of interest charged on the card. This amount represents the yearly percentage owed on the card. Since credit card payments are divided up into monthly payments, the APR is divided by 12 when figuring the interest due each month. For instance, a card with an 18 percent APR requires that a 1.5 percent interest rate be attached to the principal amount each month.

As the consumer makes regular payments, the mathematics of credit card amortization demands that they will owe less money with each subsequent payment, assuming that they are no longer using the card. Using the example from above, a principal of $1,000 US Dollars (USD) with 1.5 percent interest means that the consumer owes $1,015 USD for that month. If he or she pays $100 USD in a monthly installment, the principal would be knocked down to $915 USD, which, with the 1.5 percent interest calculated, becomes approximately $928 USD total. This process continues until the principal is completely gone.

People in debt may be looking for ways to make their credit card payments manageable and while still paying down balance. These people may need a credit card amortization calculator, which can be found on various websites or offered by financial professionals. The calculator allows them to plug in the amount owed and the amount which they can afford to pay each month to see how long it will take to pay off the card.