Credit Cards: Pay Early – Pay Often

by Dual Income No Kids on November 19, 2008 · 0 comments

Today’s post is in response to a reader who is diligently paying down debt, and wanted to know:  whether it makes a difference to pay one lump at the end of the month, or smaller payments weekly or bi-weekly.

The answer is yes!  It does make a difference.  Most financial experts will tell you there is a marginal benefit to paying by-weekly.  However, my best advice is: pay as much as you can, as often as you can!

See, credit cards work on what they call “average daily balance.”  This means that you pay interest based on the average balance over the course of the month.  This means that if you pay a day earlier, that is one less day of interest that you pay for.  So in addition to saving money on stamps, instant online payment can also make a big difference in the long run.

Because of this, you should pay off as often as you can.  Also, stretch yourself, if you have budgeted x amount of money per pay period, do whatever you can to add to that.  Pay x + y and you’ll be free from credit card debt even sooner.  When I paid off mine, I lived as frugally as I could manage and threw absolutely everything else at my credit cards.  Here is a piece that spells out clearly how to pay off cards faster.

You should also be aware, however, that credit card autopay doesn’t always work as well as you think it does.  If you make an extra payment, many cards will then stop the auto pay, so don’t just assume you are covered.  This depends per lender, so make a call to find out.

Here are a couple of other posts related to this subject that you might find helpful.  How to get 20% returns by paying off your credit card, savvy credit card use, how to avoid fees, five tips to pay off your cards, and as always, live within your means!

If you need further encouragement to pay off your plastic, other than a looming economy, you can play around with these credit card calculators, credit card pay off, snowball calculator (paying off multiple cards), and the optimizer (shows difference in rate).

You can also take a look at how James paid off his cards, and what approach I took.



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