Credit card interest: how a $5,000 balance costs $8,887 and takes 19 years at the minimum
The minimum payment is designed to keep the balance alive. Paying $250 a month instead clears the same debt in 26 months for $1,449. Same card, same rate.
A credit card statement shows three numbers: the balance, the minimum payment and the interest rate. The relationship between them is rarely worked through, because the minimum payment is small and paying it makes the statement go away. Here is the relationship.
How the minimum is set
A common formula is interest for the month plus 1% of the balance, with a floor of $25. On a $5,000 balance at 24% APR — a typical rate for a store card or for a borrower without a top credit score — interest for the month is $100, and 1% of the balance is $50. The minimum is $150.
Each month the payment covers the interest and $50 of principal; next month the balance is $50 lower, so the interest and the minimum both fall, and so does the amount of principal paid. The balance shrinks more slowly every month. Total interest: $8,887, over 19½ years. Wealth Signal calculation; the formula is stated above and different issuers vary it.
The same debt at fixed payments
| Monthly payment | Months to clear | Total interest | Total paid |
|---|---|---|---|
| Minimum (interest + 1%, min $25) | 234 | $8,887 | $13,887 |
| $250 fixed | 26 | $1,449 | $6,449 |
| $500 fixed | 12 | $635 | $5,635 |
The second and third rows are the same card, the same rate and the same starting balance. The difference is that a fixed payment does not fall as the balance falls, so an increasing share of each payment is principal. That is the entire mechanism.
Why 24% is not 2% a month
The APR is divided by twelve and charged on the balance each month, and the charge is added to the balance. 2% a month compounded is 26.8% a year, not 24%. On a balance carried for a full year without payment, that is the rate actually paid.
A card paid in full each month charges no interest on purchases: that is the grace period. Carry any balance past the due date and the grace period ends — interest is charged from the transaction date on new purchases too, until the balance has been paid in full for a cycle. One partial month can cost two months of interest.
What moves the number
- The rate. The same $5,000 at 18% instead of 24% at $250 a month clears in 25 months for $1,062. A balance transfer to a 0% promotional card, with its fee — typically 3–5% of the balance — is the same arithmetic with a different rate and a deadline.
- Any extra principal. $50 more a month on the $250 row saves $340 and five months.
- New spending. Every dollar added restarts the clock on itself at 24%. The table assumes zero, which is the assumption most likely to be wrong.
An issuer that set the minimum at $500 would collect $635 of interest from this borrower. At $150 it collects $8,887. The minimum is the number that maximises interest without triggering default, and it is printed on the statement in the same font as the balance. The lesson on debt covers which debts are worth carrying; this one is not on the list.
Sources
- Consumer Credit — G.19Board of Governors of the Federal Reserve System · checked Sep 24, 2026
- Credit cards: key termsConsumer Financial Protection Bureau · checked Sep 24, 2026