Credit card payments are different than making payments to other creditors. With most creditors, making an early payment does you no good.
For example, your mortgage company won’t credit your balance owed a week early when they receive your early payment. They’ll do it on the monthly due date per the amortization schedule. Same for payments on student loans and auto loans.
By law, when credit card companies receive payment from you, whether it’s once, twice, or five times during a payment period, your owed balance must be reduced on the day funds are received. This is unlike most loans where principal reductions, if allowed, can be done no more frequently than once a month and only on the payment due date.
Credit card companies charge you interest every day on your owed balance. Reducing your balance owed before your due date results in less interest generated on that now smaller balance. That’s why the sooner you can make a payment the more money you’ll save. Making early credit card payments can drastically reduce the time in takes to get out of credit card debt without committing any extra money!
Credit Card Debt Example
Samir the Swiper has the following credit card debt he wants to eliminate:
Interest Rate ~ Regular Payment ~ Balance Owed ~ Name
24% ~ $240 ~ $12,000 ~ Credit Card
5% of $12,000 equals $600 (12,000 multiplied by .05)
Samir gets paid $1,600 every two weeks. This month he gets paid on the 10th and the 24th, and his credit card bill is due on the 30th.
Samir cut back on his expenses so he could raise his debt elimination percentage to 20%. That generates a little more ($640) than the recommended $600 per month. If you can afford it, set your percentage higher, much higher than 5% and save even more. Remember, if you set your debt elimination percentage below 3%, it’s going to be a much longer haul to eliminate your unwanted debt.
With most bills, Samir would hold on to the $320 generated each paycheck by his debt elimination percentage, add it to his regular payment of $240, and pay the bill on the due date.
Samir does not want to wait until the 30th to pay. This is credit card debt which calls for a different strategy. He wants to pay as much of that $880 (320+320+240) from his first paycheck on the 10th. This will reduce his credit card balance on the 10th, and he’ll enjoy 20 days of reduced interest charges on that now lower balance versus waiting to pay on the due date.
If Samir can’t afford to pay the whole $880 from the first paycheck, finish it off on the 24th when he gets his second check. By wiring the remaining money on the 24th after his paycheck clears, he’ll still enjoy lower interest charges for 6 days versus waiting till the due date on a now even lower credit card balance.
Samir can cut the time it takes to pay off his credit card debt roughly in half compared to paying on the due date by continuing this behavior. Please employ this early payment strategy if you have credit card debt. It will get you out of debt faster than you thought possible.
Take advantage of technology when paying off credit cards. The faster your payment gets to the credit card company, the more money you save. You might think a few days won’t make much difference, but over time it does.
If you’re not already, sign up for direct deposit for all income sources. This assures you’re receiving your money as quickly as possible. Schedule your credit card payment the same day your paycheck clears. This assures you’re paying your credit card company as quickly as you can.
Any time extra money rolls your way, send it off electronically, even if it’s just a few dollars. In Samir’s case, since his credit card company is charging him a whopping 24% on his balance every day, every little bit extra translates into appreciable savings.
The higher the interest rate on the credit card you’re trying to pay off, the more desperate you need to be to pay it off. If we’re talking double digit interest, which is obscene in our current environment of still low interest rates, you should be very desperate.
It’s you who should be in crisis mode. If you’re charitable, whether helping a family member, cause, church, or other entity, you need to be selfish, temporarily anyway. If necessary, have a heart to heart and explain how it’s you who’s in a money crisis. You can be even more charitable once you rid yourself of that high interest debt.
Have a get out of credit card debt garage sale. Sell items over the internet. There are literally hundreds of ways to generate more money. Check out Saving Money for more ideas.
Besides slashing expenses and selling unwanted items, work on trying to make more money too. Corral as many overtime hours as you can. Take on a second job. Look for another job that pays more.
Credit Card Payments
Your debt elimination period is finite. Months from now it will all be over. It may be worth the extra effort to temporarily boost your income, given all the money you can save.