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I am about to start a 12 month part-time course, requiring variable but monthly payments. To maximise my budget I want to pay for it via credit card, but am trying to understand which method will end up with less interest.

I have the following scenario:

  • Credit card A: $0 balance, 24.99% interest rate, 90 day interest free purchases
  • Credit card B: $4.5k balance, 11.99% interest rate, 55 day interest free (but the balance has not been paid in full for a long while), 3% monthly minimum repayment
  • ~ $1200/month capacity for repayments
  • The course will cost anywhere from $400 to $1200 (and even slightly more towards the end) each month.

My first plan was to just put $1200 each month onto card B and use the same card to pay for the course, gradually lowering the balance on B. This also covers the minimum repayment, stretching the repayment capacity a little bit more than other options.

But I figure I would pay less interest if I utilise the interest-free period on A and put the course costs on that, repay those the next month, and use the remainder (maybe $400 in a typical month) towards card B. Edit: I don't use the credit card for any other expenses, it will only be the course.

The balance on B will still decrease at the same rate, but I won't be paying interest on new purchases and will come out in front, right? Or is it purely the end balance that matters with interest, so using A just complicates things with no benefit?

Appreciate any help you can give on this. And I know that the cheapest option will be to defer the course for 6 months but that is an absolute last resort. I'm in Australia.

An edit to answer some comments: If I'm paying in cash my budget for the course is about $1065/month as I need to save a bit for the minimum repayment on the credit card. If I'm using the card though, the repayments I make will well exceed that amount, so my budget can be $1200/month.

After this course there is a second I will need to complete to be fully qualified which has sporadic commencement dates. Delaying the first course will have a snowball delay next year. I'm 29 which isn't the end of the world but all things considered I am happy to pay some extra interest, to a point, to start earlier.

I also am not eligible for the 55 day period on card B until the balance is zero.

  • In theory it would make more sense to use A if you WILL pay those 1200 taken out each month. But with such long grace period I would check what is considered "purchase". – SZCZERZO KŁY Jan 17 at 11:20
  • Maybe I just haven't had enough coffee yet, but what does "maximise (your) budget" mean? – RonJohn Jan 17 at 12:39
  • Why 6 months? By my math you can pay off card B in 4. Why is that a "last resort"? – D Stanley Jan 17 at 14:26
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    Since you are carrying a balance on Credit Card B, _ it is quite likely that you are not getting a 55 days interest-free loan on new charges_, unless of course rules are very different in Australia from most of the rest of the world. In the US, interest would be charged from Day 1 on new purchases because you didn't pay off last month's statement balance in full. In some parts of the world, interest is charged from Day 1 regardless of whether the previous month's balance was paid in full or not. – Dilip Sarwate Jan 17 at 15:02
  • Is it an option to get a 3rd card that offers zero interest for 12 months or more ? – jamesqf Jan 17 at 17:06
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If you have some flexibility in when you can start the course, here's what I would do with your $1,200 surplus:

Wait 4 months, pay off card B completely, then pay for your course with cash. Anything else is playing with fire. All it takes is one "emergency" that prevents you from making a full payment, and you're paying much more interest that you could if you optimize your churning.

Note that depending on the terms of your card, you probably pay interest on the average daily balance of the card, so adding to it then paying it off before the statement will mean that you pay interest on the $1,200 each month. You'd be better off putting it on A and paying off B as quick as you can, but again you're playing with fire and I'd recommend just getting B knocked out first.

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It's really hard to give general answers to questions that present such specific scenarios, because the method your issuing bank uses to calculate balance and interest may be different than what we guess at, in ways that have big impacts on your result. You may also not be aware of details that make an impact:

  • Is there a grace period on new purchases on card B?
  • Have you forfietted your grace period by carrying a balance?
  • Is that entire 4.5k balance actually sitting at the 11.99% interest rate, or is some of it at a different rate because it was a cash advance, balance transfer, or other balance type?)

There are also really subtle impacts from timing of certain actions:

  • When you suggest putting the new costs on a given card "and then paying it off" - are you talking about paying it off immediately? As in the same day? Same month, before the cycle? Next month, after the cycle, but before the due date? Some things have daily impacts (interest calculated off average daily balance), other things have monthly balance but different "triggers" each month (due dates, cycle dates).
  • If you are doing this on the card that already has a balance, do you know if the new payment will apply to the existing balance, or to the new balance (which may or may not be in a different bucket, from an interest perspective)?
  • Following on that second bullet, if you make the payment on the same day as the purchase, do you know if your bank will consistently process them in the actual order in which you performed them, or will they sometimes process the payment first, because of how their batch processing works?

There are also other potential differences, which maybe aren't as critical. Mainly, does either card have a rewards program? Pumping money through a rewards card can be lucrative, sometimes more so than other places you park your money: my credit union's credit card rewards program pays more than their savings accounts do. You can "earn" more by pumping money through the card versus letting it sit in a savings account. Further, the interest on the savings account is taxable, but rewards programs aren't.

Getting down and dirty with the details of your card agreements and statements can help you answer these, and you should do that before you come up with a scheme. Of course, you should also look at your statements carefully each month to make sure your scheme is working. And, if you are ever putting money on credit cards, you need to understand that you're running the risk of things becoming very expensive if life throws you a curveball.

The overall best plan probably depends on how conservative you are, financially. The most conservative plan would probably be to pay down B as fast as you can, and wait to take the course until you can pay in cash, upfront, and totally forget about your credit cards.

A scheme that lets you pump money through a card with rewards on it would perhaps be nearly as conservative, although some people are afraid of doing this because of the risk of having any credit for any length of time, even if it's effectively only a few hours and incurs no costs or interest.

Your plan of balancing actions on different cards would probably be seen as risky by many people, but if you want to be able to take the course now, instead of waiting, it makes sense to understand your options. If you know you can make purchases on B and pay them off immediately without incurring interest (check your card agreement to see if new purchases have a grace period under your current conditions), then it basically doesn't matter if you put the purchases on A or B. If you can't use B in an interest-free manner for new purchases (which is the case for most cards), you would need to use A to get the new purchases interest-free, just make sure you understand the conditions of the promo on A so you can be sure you fit within them.

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  • Thanks for this. I think this answers the root of my confusion, in that interest is charged daily on whatever balance is there. My repayments will be in weekly installments totaling about $1200/month (one of my income sources is slightly variable so this is an average). So if I put the big charges on B they will gather interest right away, unlike A. Unless the debits come out later in the month... I still have thinking to do but whatever leaves the lowest average daily balance on B will be cheapest, if I understand correctly. – Ben Jan 22 at 2:14

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