Microsoft Office Tutorials and References
In Depth Information
Creating Amortization Schedules
Credit card calculations
The final type of loan amortization schedule is for credit card loans. Credit cards are different
beasts because the minimum payment varies, based on the outstanding balance. You could use
the preceding Payment Table method, but it offers only nine rows of varying payments —
probably not enough for most applications. You could also use the method where the payments are
entered directly in the schedule. When the payments are different every time, however, the
schedule loses its value as a predictor or planner. You need a schedule that can predict the future
payments of a credit card loan.
Credit card calculations represent several nonstandard problems. Excel’s financial functions (PV,
FV, RATE, and NPER) require that the regular payments are at a single level. In addition, the PMT
function returns a single level of payments. With IRR and NPV analysis, the user inserts the
varying payments into a cash flow.
Credit card companies calculate payments based on the following relatively standard set of criteria:
h A minimum payment is required. For example, a credit card account might require a
minimum monthly payment of $25.
h The payment must be at least equal to a base percentage of the outstanding debt.
Usually, the payment is a percentage of the outstanding balance but not less than a
h The payment is rounded, usually to the nearest $0.05.
h Interest is invariably quoted at a given rate per month.
Figure 13-4 shows a worksheet set up to calculate credit card payments.
The formula for the minimum payment is rather complicated — just like the terms of a credit
card. This example uses a minimum payment amount of $25 or 3% of the balance, whichever is
larger. This small minimum payment results in a very long payback period. If this borrower ever
hopes to get rid of that balance in a reasonable amount of time, he’ll need to use that additional
The minimum payment formula, such as the one in B13, is
From the inside out: The larger of the minimum dollar amounts and the minimum percent is
calculated. The result of that is rounded to the nearest five cents. This rounded amount is then
compared with the outstanding balance, and the lesser of the two is used.
Of course, things get much more complicated when additional charges are made. In such a case,
the formulas would need to account for “grace periods” for purchases (but not cash
withdrawals). A further complication is that interest is calculated on the daily outstanding balance at the
daily effective equivalent of the quoted rate.