How Minimum Payments Affect Our $25,000 Example

HOW MINIMUM PAYMENTS AFFECT OUR $25,000 EXAMPLE

Credit card issuers require that we send minimum payments to them each month. Some issuers require a minimum payment as low as 1% of our outstanding balance while others ask for up to 3%. It all depends on their individual policy.

Don't forget that we pay this minimum payment to them each month with their own money.

Our goal is to pay back the credit card issuer as slowly as possible so that we always have the highest available amount of THEIR money working for US, earning interest in our bank accounts. An issuer that asks for a minimum monthly payment of 1% is therefore more desirable than one that asks for 3%. We get to keep more of their money in our bank account each month instead of paying it back to them.

On average, a minimum monthly payment of 2% has been the norm for most offers we have accepted so we will build our example around that.

In the table below, we illustrate how making the minimum monthly payment affects our total interest earned each month. This example is based on a $25,000 balance transfer parked in a money market account earning 5% per year:

Month 1 - Our total outstanding balance is $25,000. We are also earning interest on that full $25,000 this month.
At the end of the month we pay the minimum payment of $500 ($25,000 x 2%) and we have earned interest for the month in the amount of $104 ($25,000 x 5% Divided by 12). *We figure the monthly interest by dividing the annual rate of return by 12 (12 months = 1 year)

Month 2 - Our total outstanding balance is knocked down to $24,500 after our month 1 minimum payment and we now have just $24,500 earning interest for us this month as well.
At the end of the month we pay the minimum payment of $490 ($24,500 x 2%) and we have earned interest for the month in the amount of $102 ($24,500 x 5% Divided by 12).

Month 3 - Our total outstanding balance is knocked down to $24,010 after our month 2 minimum payment and we now have only $24,010 earning interest for us this month.
At the end of the month we pay the minimum payment of $480 ($24,010 x 2%) and we have earned interest for the month in the amount of $100 (24,010 x 5% Divided by 12).

Month 4 - At the end of the month we pay the minimum payment of $471 ($23,530 x 2%) and we have earned interest for the month in the amount of $98 ($23,530 x 5% Divided by 12).

Month 5 - At the end of the month we pay the minimum payment of $461 ($23,059 x 2%) and we have earned interest for the month in the amount of $96 ($23,059 x 5% Divided by 12).

Month 6 - Minimum payment of $452 ($22,598 x 2%) and monthly earned interest of $94 ($22,598 x 5% Divided by 12).

Month 7 - Minimum payment of $443 ($22,146 x 2%) and monthly earned interest of $92 ($22,146 x 5% Divided by 12).

Month 8 - Minimum payment of $434 ($21,703 x 2%) and monthly earned interest of $90 ($21,703 x 5% Divided by 12).

Month 9 - Minimum payment of $425 ($21,269 x 2%) and monthly earned interest of $89 ($21,269 x 5% Divided by 12).

Month 10 - Minimum payment of $417 ($20,844 x 2%) and monthly earned interest of $87 ($20,844 x 5% Divided by 12).

Month 11 - Minimum payment of $409 ($20,427 x 2%) and monthly earned interest of $85 ($20,427 x 5% Divided by 12).

Month 12 - Minimum payment of $400 ($20,018 x 2%) and monthly earned interest of $83 ($20,018 x 5% Divided by 12).

At the end of month 12 and BEFORE our teaser rate expires, we pay back the remainder of the balance ($19,618) and our bank account is left with a balance of $1,121. This amount is the total interest we made over that 12 month period and is ours to keep.

Now if you were really paying attention and are good with compounding returns you possibly noticed that this example actually shortchanges our real return by a few dollars.
To be more accurate, we should have added each month's earned interest on top of our totals before calculating the following month's interest. As we are trying to keep this as simple as possible, we left this out of our explanation to keep things moving along. Just know that when done correctly, this example actually returns a total of $1,148 for the year.

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