Credit card payment question re: minimum payments

[belleoftheball]

Hi guys,

I've been researching the best way to pay my credit card down. Normally, I try to pay the minimum payment requested by the bank x 2. So, if I owe as minimum of $330 a month, I pay $660 - or more - whatever I can afford. After reading a few debt sites and advice forums, some people say that it's better to pay the minimum when it's due, and pay more two weeks after ... they say this will reduce debt faster than paying one lump sum at the beginning of the month. Is this true? As you can probably tell, I'm terrible when it comes to math. Should I be splitting the payment in two each month? Would it be advantageous for me to do so, rather than paying the minimum payment x 2 in one lump sum at the beginning of each month? Any suggestions or advice would be very much appreciate. Many thanks.

[bjl584]

I guess that logic has something to do with average collected daily balance for interest accrual. But, I'm not sure that it works that way.

The best advice is to not have a credit card balance in the first place.

How much credit card debt do you have?

The best thing that you can do is pay off the bill in full every month. If you can't afford it then don't buy it.

[disneysteve]

It might make a minor difference depending on how interest is calculated but I can't imagine it would be enough to be worth the hassle. Make your payment every month. Live as far below your means as possible and other than maintaining a small emergency fund, send every spare penny to the credit cards.

If you'd like more advice, give us more information. How much debt do you have (include interest rates)? How much do you earn? What are your monthly expenses? How much, if anything, do you have in savings? Are you contributing to any retirement plan?

[snafu]

Belle, welcome to SA. It's really important to understand how much interest the credit card adds to your account each month. The higher the interest rate, the more you get charged for the privilege of 'renting' their money. If you look at your last bill it will tell you the end date of your billing cycle and the date each month's payment is due. If you look at the sum added as 'Interest,' and multiply it by 12 [use the calculator on your phone] you will get some idea of what you are paying in interest fees.

If you offer a few more details we can likely offer suggestions to get credit card bills paid off faster.

[phantom]

Whether or not it makes a difference depends how interest is being calculated. Let's assume interest is added everyday. In that case you would want to send payments whenever you have the money to send because the lower your balance when the interest is charged each day, the less new interest.

So, if you have $600 to send when the bill is due, you want to send all of it. Holding back $300 would hurt, not help. But, if you find yourself with an extra $300 before you get your next bill, you would want to send that rather than wait. The quicker you can get money to the credit card company, the better.

All that said, I agree with disneysteve that it is unlikely to save you enough to be worth th hassle.

[Savingonitall]

Paying off debt

The sooner you pay down the principal the less you will pay in interest. That's the point of multiple payments. If you have the money to make the extra payment then make the payment as soon as you can. It reduces your total debt and your accrued interest. There is no rule that says you can't make 4 payments in a month.... I have sent in payments for as low as $10 just because I had it. Automating you payments using on online bill pay, provided free by many banks, can make it easier to manage making multiple payments. You also are not paying for both postage and for the envelopes.
Hope that helps!

[Bob B.]

Right, depending upon how that particular card calculates interest, it may make an infinitesimally small difference on how the interest accumulates.

If it works for you to pay $660 or more at the beginning of the month, and make only one payment per month, keep doing it that way.

It's better than making a smaller payment at the beginning of the month with the intention of paying more in the middle of the month, and spending the money, and not be able to make the additional mid-month payment.

[Petunia 100]

Hi guys,

I've been researching the best way to pay my credit card down. Normally, I try to pay the minimum payment requested by the bank x 2. So, if I owe as minimum of $330 a month, I pay $660 - or more - whatever I can afford. After reading a few debt sites and advice forums, some people say that it's better to pay the minimum when it's due, and pay more two weeks after ... they say this will reduce debt faster than paying one lump sum at the beginning of the month. Is this true? As you can probably tell, I'm terrible when it comes to math. Should I be splitting the payment in two each month? Would it be advantageous for me to do so, rather than paying the minimum payment x 2 in one lump sum at the beginning of each month? Any suggestions or advice would be very much appreciate. Many thanks.

Interest accrues on your outstanding balance each day. Therefore, the sooner you can send in money, the sooner your balance is reduced, and the sooner your daily accrued interest goes down.

So it is a timing issue. If you have $660 set aside on the payment due date and you decide to hold part of it back for two weeks, you will pay more interest that way. You don't want to do that.

However, if two weeks before the next payment is due, you have $330 set aside for the next payment, go right ahead and send it in immediately. You will pay less interest that way.

[doingitallwrong]

some people say that it's better to pay the minimum when it's due, and pay more two weeks after ... they say this will reduce debt faster than paying one lump sum at the beginning of the month.

That's a little backward. If you have $660 when the minimum is due, pay it. There's no sense in hanging on to half of it for two weeks. Where the savings comes in is if you then have another extra $330 before the minimum payment is due. In that case, if you pay it when you have it you will save on your interest charges.

As has been pointed out, though, in most cases the savings aren't going to be hugely significant (although it would depend a bit on your outstanding balance and your interest rate). As a brief example using a round number, suppose you have a $10,000 balance due at the beginning of your billing, which was subject to interest (18% APR) from day one. If you pay $330 15 days into the (30-day) cycle, and you pay another $330 on your due date (which we'll say is 25 days into the cycle), you'll be charged $146.70 in interest for that cycle. (Most credit card interest is charged monthly based on your average daily balance, so that's what we're assuming here. Your average daily balance is $9,780 ($10,000 * 15/30 days = $5,000; less $330 = $9,670 *10/30 days = $3,223.33; less $330 = $9,340 for 5/30 days = $1,566.67. Add $5,000 + $3,223.33 $ 1,566.67 for $9,780.) 18% APR = 1.5% interest monthly. $9,780 * 1.5% = $146.70)

If you have the same balance/interest and pay the full $660 on your due date, your interest for that month is $148.35 (Your average daily balance in this case is $9,890 ($10,000 * 25/30 days = $8,333.33; less $660 = $9,340 for 5/30 days = $1,566.67. Total is $9,890.) $9,890 * 1.5% = $148.35)

So you'd save $1.65 per month by paying twice on the account, rather than once, or about $20 per year. Any savings is good, of course, but $1.65 might not be worth the time it takes you to make two payments in a month.

ETA: On the other hand, you'd save even more by paying the full $660 shortly after the billing cycle starts. If you pay it on day 5 of the cycle, you'd end up with $141.75 in interest, saving $6.60 per month or $79.20 per year. You'd basically have to pay two times close together (i.e., day 25 of one cycle and day 5 of the next), and then you'd be almost on a month-ahead schedule.

[jrichman]

Agree with the consensus of the thread that it makes more sense to just pay the debt as you can. Depending on how much debt you have, you might also want to consider a debt consolidation installment loan to lower the APR. (There are pros and cons of that)

What is the outstanding balance?

[Randomsaver]

What I think they meant when they say it's advantageous to pay later the additional is when they have this money invested in higher interest securities.

That means pay the minimum on due date. Hold on your savings and let it accrue interest earnings then exit. Pay your additional and pocket the interest earning from the hold.