Although the idea of paying bills more than once a month may make you cringe, a case can be made for paying down a credit card balance in increments throughout the month. If you carry a balance, making earlier payments means paying less interest overall. And multiple payments can boost your credit score along with your will to keep plugging away at the debt.
Credit card companies calculate interest based on your average daily balance. The sooner you make a payment, the sooner you bring down your average balance and the less interest you pay. For this reason, making a $200 payment now and a $300 payment next week is a little bit better than making a $500 payment next week, because you save a week’s worth of interest on the $200 you pay now. For example, if the interest rate on your card is 15 percent and you make a $200 payment now instead of waiting a week, you will save about 57 cents in interest.
A credit card's minimum payment is usually a flat percentage of your outstanding balance. For example, if the card issuer calculates your minimum payment as 2 percent of your balance and you owe $2,000 total, your payment is $40. On the other hand, if your annual percentage rate is 15 percent, a $2,000 balance will generate interest of $25. This means that most of the minimum payment is going toward interest, with only $15 paying down the principal. Making the minimum payment now and an additional payment toward the end of your billing cycle means the later payment goes entirely toward paying down the principal you owe on the card.
Because the minimum payment usually doesn’t cover much of the principal, it takes a long time to pay off a balance by paying only the minimum. Paying the minimum payment twice a month -- for example, every payday -- instead of once means you can pay off a credit card in a fraction of the time it would take otherwise. If you can’t squeeze an extra payment out of your budget every month, consider paying half of the minimum payment every two weeks. You will eke out a little bit of savings on interest, and pay down the balance a little bit faster because you will essentially be making 13 minimum payments in a year instead of 12.
Accounting and Behavior
Making multiple payments is a little more work on your end, because you must keep track of each payment and make sure it is applied correctly. On the other hand, even though the actual savings are relatively low, making several payments can keep you motivated to keep paying down the debt instead of just making the minimum payment. Getting the money out of your bank account keeps you from spending it, and making frequent payments keeps the debt in focus.
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