You have a plan in place to pay off your credit cards – that’s fantastic! You should feel good about it. But there is a way for you to make the most out of the payments you are sending to your cards every month, and that is to lower the amount of interest charged to you.
Ask the Credit Card Company
One of the simplest ways to do this is to call up your credit card company and ask them to lower your interest. In most cases, they will do so as long as you have a decent history of paying off your bills on time. You usually want to try to keep this kind of request to AT MOST twice a year – every six months is a good number to go with. Be aware that this does not always work.
Reduce Your Average Daily Balance
Credit cards charge you interest based on your average daily balance; it is not charged on the balance at the end of the statement period. To that end, it is in your best interest to reduce the average daily balance you are carrying. This is very simple to do: rather than make one payment each month, split up the payment by week.
For example, if your minimum payment is $25 to the card, divide that number by 4 weeks. Your new weekly payment is $6.25. True, this small payment won’t reduce your balance very much, but it will reduce your average daily balance.
To show you the difference, let’s assume an annual interest rate of 18.5%. The daily rate is approximately 1.54%, or 0.0154 (0.185 / 12). We’ll use the month of December for this example. With a balance of $500, your minimum payment is $25 (if this were an actual card, the minimum would probably be more like $15, but that’s not important), and your due date is the 27th.
If you were to pay the minimum payment on the 27th, you would be carrying a $500 balance for 26 days and a $475 balance for 5 days. This would make your average daily balance $495 ((($500×26)+($475×5))/31).
If instead you broke up that payment into 4 weeks, paying $6.25 a week, this is how your balances would look:
December 1: $500
December 8: $493.75
December 15: $487.50
December 22: $481.25
December 26: $475.00
Your average daily balance in this example would be $488.51 . The calculation for that would be ( ($500×7)+($493.75×7) + ($487.50×7) + ($481.25×4) + ($475×6) ) / 31. There is a $6.49 difference in the balances, which is not much, but will lower your interest (and it would add up if your payments were higher).
In the first example, you would get an interest charge of approximately $7.63 . With the second example, your interest charge would be approximately $7.53 . Again, it’s not a huge difference, but with higher payments the difference in the interest charges will be much more noticeable. For example, if held a balance of $1,500, the minimum payment would be approximately $45. Split that up over 4 weeks and that gives you a payment of $11.25/week. If you paid it in one shot, your average daily balance would be $1,492.74. Whereas if you broke it up using the above example, it would be $1,479.31. Your interest for paying it all in one shot would be $23.01 vs $22.81. In this case, it’s again a small difference – but it’s a difference of $0.20. If you had an even larger balance the difference in how much interest you’re paying would add up even more.
This same principle applies to your savings account as well, though in that case you’ll want to increase your average daily balance rather than reduce it.
While the savings in interest may be minimal, you need to remember that more of your money is going toward paying off your credit card debt than it is going toward interest. The less interest that you have to pay out, the better you will be for it.