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Pay Credit Card Bills Early
Q. I'm confused.
One source says I should really be concerned about the annual percentage rate for my credit cards and another source recommends paying bills
early in the billing cycle to save money. Which source is correct and
what should I do?
A. Unlike "one-size-fits-all" clothing,
the best advice about credit cards really depends on many personal factors,
including how you use the card and your repayment habits. Both sources
have some truth and useful points.
- If you carry a balance on your credit card, the lower
the annual percentage rate (APR) of your card, the less you will pay
in interest or finance charges during a given year. In short, if you
never pay your bill in full, and other features of several cards are
the same, the one with the lowest interest rate will save you the most
money over time.
- If you always carry a balance, making your monthly payment
early in the billing cycle (even before the stated due date on the billing
statement) will also save you money. Why? Because most credit card issuers
use the average daily balance method to figure monthly interest or finance
charges. If you make your monthly payment early in the billing cycle,
you reduce the daily balance for more days in that cycle. This also
reduces the total balance used to figure the average daily balance for
that month. See the back page of this sheet for examples of how paying early
in the billing cycle reduces the monthly interest charges.
- If you pay your monthly bills in full each month by the
due date, you will avoid all interest charges.
Example 1. Credit Card Charges and Interest When Monthly
Payments Are Made Early in the Billing Cycle.
Previous balance (May) = $500, APR = 0.18%, and monthly
interest rate = 1.5
|
June
|
June
|
June
|
June |
June
|
1
2
3
4
5 |
7
8
9 $400 payment
10
11
12 |
13
14
15
16
17 $30 prescription
18 |
19
20
21
22
23
24 |
25 $300 car payment
26
27
28
29
30 |
Average daily balance calculations:
|
Date
(a)
|
# of Days
(b)
|
Current Balance
(c)
|
Total Balance in period
(d) = (b) x (c)
|
June 1-8
June 9-16
June 17-24
June 25-30 |
8
8
8
6
|
500
500 - 400 = 100
100 + 30 = 130
130 = 300 = 430 |
8 x 500 = 4,000
8 x 100 = 800
8 x 130 = 1,040
6 x 430 = 2,580
Total Balance = $8,420
|
| Average daily balance
|
= total daily balances/# of days in
billing cycle
= $8,420 ÷ 30
= $280.67 |
| Interest charge |
= $280.67 x .015 = $4.21 |
Example 2. Credit Card Charges and Interest When Monthly Payments Are
Made Late in the Billing Cycle.
Previous balance (May) = $500, APR = 0.18%, and monthly
interest rate = 1.5
| June |
June |
June
|
June |
June |
1
2
3
4
5 |
7
8
9
10
11
12 |
13
14
15
16
17 $30 prescription
18 |
19
20
21
22
23
24 |
25 $300 car payment
26
27
28
29 $400 payment
30 |
Average daily balance calculations:
|
Date
(a)
|
# of Days
(b)
|
Current Balance
(c)
|
Total Balance in period
(d) = (b) x (c)
|
June 1-16
June 17-24
June 25-28
June 29-30 |
16
8
4
2
|
$500
500+ 30 = 530
530 + 300 = 830
830 - 400 = 430 |
16 x 500 = 8,000
8 x 530 = 4,240
4 x 830 = 3,320
2 x 430 = 860
Total Balance
= $16,420 |
| Average daily balance |
= total daily balances/# of days in
billing cycle
= $16,420 ÷ 30
= $547.33 |
| Interest charge |
= $547.33 x .015 = $8.21 |
Prepared by Cathy Faulcon Bowen, assistant
professor, Department of Agricultural and Extension Education.
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