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What is Credit Card Amortization?

Amortization is the process of separating debt into equal installments paid over time. But does it apply to credit cards?

December 20, 2021

Debt is a common fixture of modern life. The average American now holds over $90,000 in debt.

The amount of debt a person has can even be a confusing subject. There are miscellaneous fees that add to your payments, high interest rates that can actually grow your debt over time (without you making additional purchases) and more.

One debt topic that is the subject of much confusion is amortization. You may have heard the term thrown around, but what is credit card amortization? And more broadly, how does amortization work? 

What is amortization?

Amortization is the process of paying down debt over time. Specifically, it describes making regular payments (including principal and interest) to repay the loan in full by its maturity date or due date. 

In other words, amortization involves figuring out the exact monthly payment amounts required to pay off the loan — along with all the interest accrued along the way — by the loan’s maturity date. 

The math isn’t as straightforward as you might think. This is because the loan’s principal (the amount owed) goes down with each payment, which lowers the future interest expense. 

Amortization also front-loads the interest. That means early payments are skewed much more towards interest, with less going towards principal, than payments later in the life of the loan. 

Amortization generally applies to large loans, such as mortgages and auto loans. Credit card amortization isn’t common, although it may apply to the refinancing of credit card debt. 

How does amortization work?

Amortization takes the total amount you’ll pay on the loan and divides it into equal payments for the life of the loan. These payments are generally made monthly. 

The monthly payment amount always stays the same — but the amount going towards interest vs. the amount going towards principal changes every month.

In the beginning, the majority of the payment goes towards interest expenses, and with each subsequent payment, a bit more goes towards the loan’s principal.

For example, consider an amortized 30-year mortgage of $250,000, at an interest rate of 4.5%: 

  • The monthly payment would be $1,266.71 monthly for the life of the loan.

  • The first monthly payment would consist of $937.50 in interest payments and $329.21 towards the principal.

  • 15 years later, the monthly payment includes $620.94 of interest and $645.77 towards the principal. 

  • 30 years later, the final payment would be just $4.73 of interest and $1,261.98 towards the principal. 

In this way, the loan is front-loaded with interest. The monthly payment stays the same regardless, but the portion going towards the actual debt principal changes every month. 

Explore an amortization schedule calculator to see this concept in action. 

How to calculate loan amortization

One of the best ways to calculate amortization is to use an online calculator:

You can also calculate it manually, although the formula is complex. 

What is credit card amortization?

Amortization doesn’t typically apply to credit cards. This is because amortization is generally used for large, fixed loans.

Credit cards are considered revolving loans. Revolving loans allow you to borrow and pay off debt fluidly. 

Credit cards are based on a predetermined credit limit, and as long as you haven’t reached that limit, you can borrow more. With each payment you make, more of that credit limit frees up, which allows you to continue making purchases on credit. 

Compare this to a fixed loan like a mortgage, and it’s easy enough to see the difference. 

Credit card amortization doesn’t generally apply because credit cards don’t have set payment amounts or a fixed loan amount. 

Debt consolidation and credit card amortization

The only time that amortization may apply to credit card debt is if an individual consolidates their debt using a personal loan

Some people who have credit card debt get a personal loan from their bank to consolidate their debt. The personal loan pays off each credit card, and then the individual just makes regular monthly payments towards the new personal loan. 

In some cases, this can result in a lower interest rate, and it may also simplify paying off debt. 

In this case, amortization may apply, as the personal loan is a fixed amount with a fixed monthly payment. The details and terms of personal loans can vary, however, so interested individuals should speak with the issuing bank for details. 

Credit card debt consolidation with Tally

If you’re exploring ways to pay down credit card debt, consider Tally†. Tally is an alternative to personal loans for debt consolidation. Tally uses a line of credit, rather than a personal loan, which means that amortization doesn’t apply. Qualified borrowers can apply for a Tally line of credit, which can consolidate and efficiently pay off credit card debt. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.