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If I have x amount on a credit card, let's say $5000. And let's say I make a paycheck of $750. If I take that $750 and put it on the CC, and I do not spend the newly credited $750 immediately (say it takes me two weeks), doesn't my daily accrued interest go down and my time to payoff lessen? I still use the CC to pay the bills. I simply do it from the CC over the next week(s).

In other words, by decreasing the daily accrued interest, am I paying more on my CC such that I would eventually pay it off because you could theoretically get to an extremely small amount of daily interest?

Side note: I only ask because I saw all the HELOC ads about paying it down and all that. I couldn't tell if that is legit. But it did make me think about doing it on a CC.

Edit: This is a question about the "money math" more than help. I can pay my bills, but I wondered if this would indeed do things quicker or more efficiently. Mostly because I do not wish to give any more money to the CC company than is necessary. They gave me a loan. I agreed to the terms. Everyone is happy. If I can legally reduce accrued interest, that is a good thing, but I didn't know if the math worked out.

I apologize if I gave the impression I was drowning in debt. I am not.

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    read the credit card agreement. it covers the accrual of daily interest. – scordova88 Aug 29 '17 at 19:08
  • "If I take that $750 and put it on the CC, and I do not spend the newly credited $750 immediately" I don't understand. If you pay the $750 towards your CC balance then you don't have it available to spend anymore. What am I missing? – jcm Jan 20 '18 at 4:24
  • @jcm but you do have an extra $750 of available balance to charge on your CC. – RonJohn Jan 20 '18 at 5:45
  • @RonJohn I see what you mean. I think that's a dangerous way to look at things though. – jcm Jan 20 '18 at 10:00
  • @jcm I agree with you about it being dangerous! – RonJohn Jan 20 '18 at 14:59
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Rule of thumb, the earlier you pay down your balance, the less interest you will accrue and the faster you will pay off the debt as a whole.

But lets play with some real numbers here. You cited $5000 balance and a $750 payment, but with various bills and things adding onto the balance over the course of a month. Now if your purchases and payments add up to the same number, you are in a losing game, so for the sake of argument I am going to say you are putting $500 + interest on the card each month and making a $750 payment. We also need an interest rate to work with, I am going to use 1%/month and 30 day months to keep the math a bit easier to follow.

You basically have two choices in this scenario, you can pay 750 a month on the card, then use it to make your $500 in purchases/other payments over time as you suggest in your question. Or you can pay $250, and hold back $500 to make those other payments directly without running them through the card, as has been suggested in some other answers.

So let us compare the two...

If I start the cycle at $5000, make a $250 payment on the first day of the cycle, then have no other activity, I will have a balance of $4750 for the month and accrue $47.50 in interest at the close of the cycle. Balance going into the next period is now $4797.50. Carry this out for a year, and your balance at the close of the 12th cycle is $2431.79, and $431.79 of your payments went to interest.

By contrast, if you pay $750 at the start of the month, then add $100 back every 6 days so that you spend $500 over the course of the cycle. You will have an average daily balance of $4466.67, which results in $44.67 in interest charges being accrued at the end of the month. This gives you a balance of $4794.67 going into the next cycle, putting you about $3 ahead of the previous method. Push this pattern out for a year and your ending balance is 2395.86, with 395.86 going to interest. Resulting in a savings of ~$36 over making the smaller payment and paying cash for your other expenses. If this happens to be a rewards card, you also have gained whatever rewards benefit it gives you.

This demonstrates that by the strict numbers game, the scenario you propose should come out a small but measurable distance ahead of making a smaller payment in order to avoid putting things back on the card. So why do so many people adamantly advise you to not do this?

Most of it has to do with psychology and risk. The cash method does not leave any room for you to over spend. You have shredded or locked up the credit card so it can’t be used casually, and when you run out of cash, you can’t spend any more. Which forces you to pay much closer attention to where your money is going.

When you are running things through the credit card, you generally don’t have that hard stop unless you are up against your credit limit, and even then most issuers are quite happy to let you go over and charge you extra fees for doing so. So if you have this plan where you are intending to put $500 on the card in a month, then lose track of something you did early in the month, and inadvertently spend $800, you are digging yourself deeper into the hole instead of climbing your way out.

There is also a risk in terms of income loss. In the cash method, you no longer have the money to spend, and you are forced to make the hard decisions about where to allocate what you do have, making you much more likely to cut back on luxury items to preserve the necessities. In the card method, it is easy to say “eh, the card has room, I can catch up again later” and not realize the mess you are causing yourself until you are in way over your head.

I personally have run all my bills through a credit card in the past so that I could have one single payment to make. Then I was unemployed for six months, and ended up moving before I found a new job. Everything in between, including the move, went on the card. Next thing I know I am carrying a balance of $15k where I used to always have it paid in full. It took roughly 10 years, including several years of working strictly in cash, to get that back under control.

I currently have a card that is carrying a balance, and I am running select expenses (such as fuel and food) through it while I whittle the balance back down. Most of my main bills are still paid directly from cash, specifically so that I don’t fall back into the same trap I did before. Even so, there were several months in the past year where the balance was creeping up instead of down, because we were not paying that close of attention to our spending.

Then my wife lost her job, and it forced us to closely evaluate where our money was going. We still run certain things through said card, but we are much stricter about it being only those select things, and the balance is trending down again. The main reason we are still channeling those expenses that way is because this is a cash back reward card, and we will be getting roughly $1000 back here in a couple more months.

  • Plus, if you choose the cash route, you can try to find a new credit card company that happily takes over your old balance and lets you go interest-free for a few months. Cut the new card (and the old one!) once you get it and then pay down your CC debt as aggressively as possible. This combination is the best method to save on interest. Second-best is to kill all CC contracts after getting a consolidation loan at a local bank. YMMV. – Alexander Aug 30 '17 at 12:03
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A few things for you to consider:

(1) Yes, if your average daily balance is lower [because you paid it off when you received your paycheck, then slowly used the card for the remainder of the month, until it's at the same balance next paycheck, vs just having the card at a flat $5k the whole month], you will accrue less interest, thereby allowing you to pay it off faster by reducing your interest payments.

BUT:

(2) Carrying a balance on your credit card is a big financial no-no, and eliminating it should be an immediate priority for you. If there is anything you can do (step 1: budget your expenses and then track actuals to see where you stand - step 2: see what expenses you can reduce - step 3: see if you can increase your income - step 4: rebudget with your new goals, determine how long it would take to pay off the card, possibly considering consolidating/refinancing your debt at a lower interest rate) to pay it off faster, then do it.

However

(3) If you have absolutely zero cash on hand, then taking your paycheck and immediately paying down your credit card, and then relying on that card to pay for things until the next paycheck, puts you at risk of your available credit changing. ie: if you have 5k on the card, and pay it down to 4.25k, then what happens to you if the credit card company [because they view you as a risk, or for whatever other reason - including a temporary hold because of fraudulent activity at no fault of your own] reduces your available credit to 4.5k? Suddenly, you will only have $250 in available spending power until your next paycheck. Therefore it may be wise for you to hold onto some amount of cash that you do not touch except for emergencies, even before you pay off your credit card.

I really recommend you search this site for other questions related to budgeting and credit cards. There are many good answers, and some of what I've said above is just opinion, so you shouldn't just take my word for it, you should try to become familiar with these topics yourself.

Good luck!

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    @johnny What your credit card company will do is very subjective - they may be limited by local laws or internal policy. However in general, I think it's fair to say that your credit limit is provided at the discretion of the company. They may need to provide some notice to reduce it (or they may not need to) or they may only do it if you fail some clause in your contract (or they may be able to change it on a whim, or when they change their own policy). Ultimately if the credit card company decides that it would be better for them financially if you had a lower limit, they will act on that. – Grade 'Eh' Bacon Aug 29 '17 at 15:36
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    There's no incentive for them to reduce your limit at this point, and it's very unlikely they would do so, the point about applying all your cash right away is that it leaves you without flexibility, a lost/stolen card could leave you without any purchasing power for several days. Fraudulent charges are usually resolved quickly, but can sometimes take weeks, so you should have some reserve cash just in case. And most importantly, as the answer says, you're playing a losing game if you're paying them interest every month. – Hart CO Aug 29 '17 at 15:51
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    @Hartco Agreed; at this point the OP looks like the 'ideal' CC customer, because a balance is being carried and payments are being made. I've added your note about the more likely cause of inability to use the card being from something like a fraud prevention hold. – Grade 'Eh' Bacon Aug 29 '17 at 15:55
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    During periods of financial trouble (housing crash, bank crashes), they may want to reduce the amount of available credit they are lending. Personal example, I had a store credit card with a $500 credit limit maxed out. When I paid off the card completely, the next month I got a notice saying my credit limit was now $100 without any other notice. – curt1893 Aug 29 '17 at 17:02
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    I've never had a credit card company reduce my credit limit. I wouldn't worry about that possibility a whole lot. But I don't doubt it happens, and sure, you don't want to paint yourself into a corner. – Jay Aug 29 '17 at 17:12
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Stop spending on the CC with the revolving balance.

After the discussion below I feel I should clarify that what I am advocating is that you make your "prepayment" (though I disagree with calling it that) to the existing CC. Then, rather than spending on that card, spend somewhere else so you won't accrue any interest related to your spending. At the end of the month, send any excess to the account that has a balance. This question is no different than I have $X of cash, should I let it sit in a savings account or should I send it to my CC balance? Yes, 100%, you should send this $750 to your CC balance. Then, stop spending on that CC and move your daily spending to cash or some other place that won't accrue interest at all.

The first step to paying off debt is to stop adding to the balance that accrues interest. It's not worth the energy to determine the change in the velocity of paydown by paying more frequently when you could simply spend on a separate card that doesn't accrue any interest because you pay the entire balance every month.

The reason something like this may be advisable on a HELOC but not a CC is the interest rate. A HELOC might run you 4% or 5% while your CC is probably closer to 17%. In one situation your monthly interest is 0.4% and in the other your monthly interest is 1.4%. The velocity of interest accrual at CC rates is just too high to justify ever putting regular spending on top of an existing revolving balance. Additionally, I doubt there is anyone who is advocating for anyone to charge their HELOC for daily spending. You would move daily spending to somewhere that isn't accruing interest no matter what. You would use a HELOC to pay down your CC debt in a lump or make a large purchase in a lump. Your morning coffee should never be spent in a way that will accrue interest immediately, ever.

Stop spending on the CC(s) that are carrying a balance. (period)

Generally credit cards have a grace period before interest is charged. As long as a balance isn't carried from one statement period to the next you maintain your grace period. If you spend $100 in the first month you have your card, say the period is January 1 to January 31, you'll get a statement saying you owe $100 for January and payment is due by Feb 28. If you pay your $100 statement balance before February 28 you won't pay any interest, even if you charged an additional $500 on February 15; you'll simply get your February statement indicating your statement balance is $500 and payment is due by March 31, still no interest. BUT. If you pay $99 for January, leaving just a single dollar to roll over, you now owe interest on your entire average daily balance. So now you'll receive your February statement indicating $501 + interest on approximately $233.14 of average daily balance ($1 carried + $500 charged on Feb 15) due by March 31. That $1 you let roll over just cost you $3.26 in interest ($233.14 * 0.014). AND. Now that balance is continuing to accrue interest in the month of March until the day you make a payment. It typically takes two consecutive months of payment-in-full before the grace period is restored.

There is no sense in continuing to spend on a CC that is carrying a balance and accruing interest even if you intend to pay all of your current month spending entirely. You can avoid 100% of the interest related to your regular spending by simply using a different card, and no rewards will beat the interest you're charged.

  • I think there are 2 mathematical flaws here. 1. I don't think it's true that this may work for a HELOC but not a CC. It's the identical concept. It's true that the HELOC has a lower rate, but so does the mortgage you're making bigger payments on. 2. OP is talking about making payments before the charges occur, meaning the interest due is lower. He might save up to $10/month in interest paying it down and letting it creep back up, vs $0 gain by only spending on a new card and paying in full each month. – TTT Aug 29 '17 at 18:17
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    @quid - I think we're talking about different things. You are talking about the CC balance staying at approximately $5K each month and moving up to $5750, then getting paid back down to $5K. Compared to that, I agree that the new card is better. But OP is talking about the HELOC strategy which takes his CC balance down to $4250 and then creeps back up to $5K in the same month. This is better than the new card where the balance would just stay at $5K for the whole month. – TTT Aug 29 '17 at 19:38
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    @TTT, If I have $750 in cash and $5,000 on a CC and I spend $650 in my daily life in a month. OP is asking "I'm going to pay $750 ($650 + interest) to the CC, then slowly spend back the $650 every month." The alternative is, end $750 to your CC now and do your $650 of spending on the new CC, send $650 (your income) to the new CC to cover your spending and $100 to the old CC, now you're paying down your CC balance without having to continually pay interest related to your normal spending. But either way you send your initial $750 existing cash payment to the existing CC balance. – quid Aug 29 '17 at 19:45
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    @johnny - if you pay the statement balance of the 2nd card in full every month, then you don't pay any interest. It's called the "grace period" and it basically means you get approximately 1 month of interest free for being a "good" customer. You would have to pay interest on that same amount on the existing card because it had a balance in the previous month. – TTT Aug 30 '17 at 19:32
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    Comments are not for extended discussion; this conversation has been moved to chat. – Ganesh Sittampalam Aug 30 '17 at 20:00
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Yes, this will reduce your total interest. But not by much.

Scenario 1: You run up bills for the month totaling $750, and then at the end of the month you get paid and pay $750.

Scenario 2: You pay $750 at the beginning of the month. Then over the course of the month you run up bills totaling $750. Assume you have carryover debt of over $750 so you don't have a credit balance at any point.

Either way, the net change in your balance for the month is zero. Assuming you spent about the same amount of money each day, the difference in your average daily balance will be $750. If you're paying 18% -- I think that's a fairly typical credit card rate -- that's 1 1/2% per month, so the difference in interest will be about $10.

Note this is the most extreme case, the difference between paying on the first day of the billing period and paying on the last day of the billing period, and assuming that you pay all your bills by credit card. So in real life the difference in the interest will probably be less. You're talking about a technique to save maybe five bucks a month.

I suppose every dollar helps. But the real solution is to get your credit cards paid off so you're not paying ANY interest.

  • The math helps put things in perspective here. – Grade 'Eh' Bacon Aug 29 '17 at 17:14
  • I think what I am asking is if by saving that five dollars a month, doesn't that lower the payment? So if I saved five in interest, but kept putting the same $750 on it, then theoretically, the plan would work. It might take 300 years, but it would work, wouldn't it? – johnny Aug 29 '17 at 21:13
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    @johnny : Yes, it would work, but see other answers for why this might not be the greatest approach. (Budgeting so that you pay off $50 per month will be much more effective). – Martin Bonner Aug 30 '17 at 11:09

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