If I have a credit card with the balance of 500.00, the minimum payment is 40.00 per month. The interest rate is 19%.  I understand the -40.00,  but every time I do times 19%, the number...

If I have a credit card with the balance of 500.00, the minimum payment is 40.00 per month. 

The interest rate is 19%.  I understand the -40.00,  but every time I do times 19%, the number keeps going up.  Wwhat am I doing wrong?   I can't get the answer.

Expert Answers
ladyvols1 eNotes educator| Certified Educator

You have the right idea.  What you are forgetting is that the interest is 19% annually.  You don't multiply by 19%.  You must first divide the interest by 12, for the 12 months in the year. This will give you a monthly rate of 1.58%.  If you take your balance of 500.00 and subtract 40.00 your remaining balance will be 460.00.  If you do not add to that balance, the bank will multiply the current balance by 1.58% and that will give you a new balance of $467.28.  This means you are paying 7.28 dollars that month for interest.  The next month you subtract 40.00 and your balance would be 427.28.  This would then also be multiplied by 1.58% for a new balance.

"Interest is the fee charged for the use of credit or borrowing. The interest rate charged by lending institutions must be sufficient to cover operating costs, administrative costs, and an acceptable rate of return. Interest rates may be fixed for the term of the loan, or adjusted to reflect changing market conditions. A credit contract may adjust rates daily, annually, or at intervals of three, five, and ten years. Lenders also charge rates proportional to the risk involved: the more risk involved, the higher the interest rate."

Hope this helps.

pohnpei397 eNotes educator| Certified Educator

I am not completely sure what you are asking because your question is not worded very clearly.  If I am wrong, please let me know.

Here is one possible problem.  If your interest rate is annual, then you need to divide it by 12 to get your monthly rate.  Your monthly rate would then be 1.58% and that would allow your balance to go down.

You would have, for example, a balance of $460 after you made the minimum payment, multiply that by your monthly rate, and end up with a new balance of $467.28

Does that seem like the right answer?