Expert: Regan Shinski - 5/12/2009

Question
I have £5000 on a credit card with my bank at 25% interest.  We have been paying off the minimum payment of £122 a month for the last year or so and the balance isn't going down.  Now that I have started to work, I want to start pay off an additional £400 a month to get the debt paid off.  The direct debit payment for the minimum amount comes out of the bank on 5th of the month.  Is there a better time of the month to make the payment so that I am paying off less interest?

Answer
Hi Terri:

The best time to make the payment is as soon as you can.  Most cards are set up to compound interest daily based on an average daily balance.  To keep it simple, let's say you have a $5,000 balance with a statement date of the first of the month.  If you wait until the 30th to make your $522 payment, the interest will basically be on $5000 for 30 days.  If you make a payment of $400 on the 10th and a SECOND payment in the month of $122 on the 30th (as an example) your interest would basically be on $5000 for only 10 days and $4600 for the last 20 days.  

Paying off $400 30 DAYS early at 25% will save you about $8.33 in interest, but remember that's potentially every month if you follow through with your plan. Put another way, you are paying about $3.43 in interest everyday on the $5000.  Every $400 additional you pay off should reduce your interest by about $.273 per day.

Basically you should make as much of a payment as often as you can.  Don't be afraid to make more than one payment a month.  SOMETIMES credit card companies set it up to limit the effectiveness of this practice, but most do not.  Also, I would not use any payment method that costs you money as it may wipe out your interest savings.  Only use free online payments, free phone payments, or mail in payments.

Finally, it never hurts to ask your credit card company if they can give you better terms.  Maybe a lower interest rate, reduced or no annual fee, etc.  The credit market is tight and lenders want loyal people that are willing to pay.  It's a bit long shot but not unheard of.  Consumers have a little more power in some cases.  If they make any concessions, just clarify that they will not report any detrimental comments to your credit reports.

Good luck and congratulations on moving towards getting this paid off!