Pay biweekly to bring down that balance
Feeling fed up with credit card companies and
all the ways they manage to yank money out of you? Fight back.
Use card companies' most common money-making ploy -- that
ever-ticking interest clock -- against them when paying down that card.
Interest accumulates daily whenever someone carries a balance
on a credit card. Because federal law requires credit card companies to process
payments the day they arrive, "the sooner you get the payment in there the less
interest you're going to pay," says Catherine Williams, president of the Consumer
Credit Counseling Service of Greater Chicago.
So not only can sending in that payment the day a bill arrives
protect people from being slapped with a costly late fee, it can save them money.
And the bigger the balance, the more interest is saved by getting that payment
in days or weeks early.
using, start paying more
One way to really mow down some of that interest is to stop charging
on the card and make payments every other week rather than every month, and
never decreasing the payment amounts until the card is paid off.
Sending a half payment every two weeks will result in 26
half payments, or 13 monthly payments a year. So paying this way gives a customer
the equivalent of an extra monthly payment each year. And getting a portion
of the payment in sooner knocks down some of that daily interest.
Let's take a look at some numbers. Consider a credit card
with a $5,000 balance, a minimum monthly payment of $100 and an annual percentage
rate of 14 percent (See Bankrate's credit
card home page for the latest rates).
By holding steady on monthly payments -- always paying $100
a month -- the card would be paid off in six years and four months with a total
interest cost of $2,547.85.
By sending $50 payments biweekly, that same card would be
paid off in almost 10 months earlier -- five years and six-and-a-half months
-- while saving $339.01 in interest.
If five or six years seems like a long time to pay off a credit card,
consider this: It would take more than 25 years to pay off that card by simply
sending in the ever-descending minimum payment each month -- typically 2 percent
to 3 percent of the card's outstanding balance. Not only would a person spend
a quarter of a century paying down a $5,000 credit card balance, but it would
cost them a monstrous $6,332.19 in interest.
People who can manage to pay the minimum payment -- but
little more -- may want to consider the biweekly pay-down method. It will help
them get the most bang for each buck they scrape together.
"Let's say you don't have a lot of breathing room," says
Gerri Detweiler, author of "The Ultimate Credit Handbook."
"You can just continue to make minimum payments and by
using this method you'll pay off the card faster and save money in interest."
But she cautions that people must be organized and financially
disciplined for it to work. Using the biweekly method means sending a payment
every other week like clockwork for years. It also means having that payment
amount available every two weeks. Lots of people get paid every two weeks. Pick
a day of the week -- say the Monday after payday -- and stick to it.
Assuming no new charges are being added, disregard the amount
due on each billing statement and keep sending that set amount. Be sure to write
the account number on each check and send the payment to the proper payment
address. It's also a good idea to call the credit card company and tell them
"It's definitely worth a call," Detweiler says. "Keep a
record of it so, if there's a problem, you will have a record that you tried
to contact them."
Tell the company
Ask the company what needs to be done to get those "extra" payments
processed quickly -- the ones that will not include a payment coupon or arrive
in the company's preprinted envelope.
While the Fair Credit Billing Act requires issuers to credit
payments the day they are received, each issuer is allowed to set specific payment
guidelines. If any of the guidelines are not met, the issuer can take as many
as five days to credit the payment. Check the back of the statement for the
And though the card companies have up to five days, most
process payments quicker than that.
"If you have all the information they need, it's going to
be processed fairly quickly," Detweiler says. "You're still going to cut your
interest costs even if it does take a few days to credit the account."
As with any pay-down strategy, it's best to avoid new charges.
Put new purchases on a different card. Use Bankrate.com's credit
card search engine to find the best card for you.
Here's how to launch the pay-down program: First, stop charging
on the card and make the normal monthly minimum payment by the due date. Then,
two weeks later, send half the amount again, and two weeks later, half again.
Repeat the half payments on the two-week schedule until the balance is paid.
"It's an easy way to get the ball rolling," Detweiler says.
"And keep the ball rolling."
-- Posted: April 6, 2004