Lesson 7 of 25 · 7 min

How long a balance takes to clear at the minimum

Clearing at the minimum is a long clock because almost none of each payment is principal.

Apply lesson 6's formula every month to the $4,280 at 21.99 percent and the balance clears in 215 months. Total paid is $11,056.52, of which interest is $6,776.52. The starting claim was $4,280. The clock that retires it at a 1-percent-plus-interest minimum is almost eighteen years, and more than half of the cash that leaves is time.

A different formula makes the principal share even thinner. If the minimum were 2 percent of the current balance with no extra principal floor, monthly principal would be 2 percent − 21.99 percent/12 = 0.1675 percent of the balance. Each month retires 0.1675 percent of whatever is then outstanding. After 600 months the balance is still $1,565.35. Fifty years of 2-percent payments have not cleared it, because the rate is consuming most of each 2 percent.

Track 1 lesson 7 is headroom: how far things can move before a test fails. Spent as a price fall, headroom is a percent of collateral. Spent as time, headroom is the number of steps a small principal share still has to take. A 215-month clock is that second framing. The $4,280 did not get larger because a price moved. It stayed large because each month's principal slice was 1 percent, then less as the balance fell, against a rate that kept taking its own share.

The minimum is a small principal share on a long clock. The 215 months and the $1,565.35 still standing at month 600 are the same fact: the slice is thin.

Key terms

Months to clear: How many times the minimum formula must run before the balance is gone. On the $4,280, 215.
Interest over the minimum path: Total paid minus the starting balance. On this path, $6,776.52 of $11,056.52.
Principal share of a percent-of-balance minimum: The stated percent minus the monthly rate. At 2 percent and 21.99 percent APR, 0.1675 percent.

Worked example

Two formulas, two leftover clocks

Wick & Pell Cards. $4,280 at 21.99 percent. First formula: max($25, 1 percent of balance plus monthly interest). Second: 2 percent of the current balance, no extra floor.

Months to clear at 1% + interest: 215
Total paid on that path: $11,056.52
Of which interest: $6,776.52
Principal share at a 2% minimum: 0.1675%
Balance after 600 months at 2%: $1,565.35

Two hundred and fifteen months to clear at 1 percent plus interest. Six hundred months at 2 percent of balance and $1,565.35 is still there.

Check yourself

On the $4,280 at 21.99 percent, what is the principal share of a 2 percent-of-balance minimum, and what balance remains after 600 months on that formula?

Clearing at the minimum is a long clock against a small principal share, the everyday version of duration in the market — more steps, Track 1 lesson 7's headroom spent as time rather than as a price fall. Open Headroom, in dollars and in percent →

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.