Minimum payments - general concepts

The minimum monthly payment required by your credit card company
almost universally includes all outstanding interest charges, fees,
and penalties. In addition, a fraction of the principal loan
balance is included in the minimum payment. The amount of principal
re-payment required differs from one credit card company to the
next.

Components of monthly payment:

Interest - this includes all fees and penalties
Principal

Ten years ago it was common practice that 5% of the balance be paid
every month. As of 2009, however, the amount may be as little as
1%.

Five percent solution:

This top chart shows the rate of decline in the loan balance over
time when
5% of the principle is included
in the monthly payment, at a 12% annual rate of interest. On an
initial loan of $1000.00 the balance is paid down to less than $200
in about 28 months, and the total interest paid for the loan is
about $165.00.

One percent solution:

The bottom chart shows the rate of decline in the loan balance over
time when only
1% of the principle
is included in the monthly payment, at a 12% annual rate of
interest. On the same $1000.00 loan, it takes nearly 81 months for
the balance to be paid down below $200. At that point in time the
cardholder has paid nearly $400 in interest.

Minimum payments - general concepts

Related reading