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Reduce Credit Card Interest With Early Payments

Posted Feb 17 2009 8:28am
Want to reduce the amount of interest you are sending to credit cards each month?  Who doesn’t?  Even if you are only paying the minimum payment, making the payment earlier in the month rather than waiting for the due date can make a noticeable difference in the amount of interest you pay.

A recent article from Red Tape Chronicles breaks down the numbers assuming a $1,000 debt payment made at different times during the month:

“A full month’s interest on $3,000 at 29 percent is $74. Make the payment two weeks early and you’ll only owe $33.37.

So by simply moving up your due date a couple weeks you chop your interest payment in half (in this example). Credit card interest accumulates based on what is known as the average daily balance.  Think of it as the average balance on your account over the entire month. 

At the end of each day your balance is recorded and the sum of all those balances is divided by the number of days in the billing cycle (typically around 30).  This figure is then multiplied by your daily periodic rate to get the monthly amount of interest you owe.

By paying your payment half way through the billing cycle you are effectively reducing the amount owed on your credit card balance, and driving down this average daily balance figure.

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