Saving Money by Paying Your Bills Early
If you can't pay your credit card balance in full by the due date,
you can still save money by paying as much as you can before
the due date. This reduces your daily balance earlier, so the interest
charged on the next month's statement will be based on a smaller
outstanding balance. The following example shows how this cuts down
on interest costs.
Example: Saving Money by Paying Your Bills Early
Mrs. Smith's credit card balance on January 20 is $3,000, and
her next payment is due on February 19. Her card carries an annual
interest rate of 18.5 per cent. This works out to a daily interest
rate of 0.05068 per cent, which is used in the calculations in the
table below. (The daily interest rate is the annual interest rate
divided by the number of days in the year.)
 Mrs.
Smith knows she won't be able to pay the balance in full, but she
has $2,000 she can use for a partial payment. Instead of waiting
until February 19 to make this payment, she makes it early, on January
20. By doing so, she saves approximately $12.00 in interest payments
on her February statement. The following table shows how this works.
| |
|
|
| Jan. 1 to Jan. 4 - No transactions |
$0 for 4 days |
$0 for 4 days |
| Jan. 5 to Jan. 19 |
$0 + $3,000 purchase of Jan. 5
= $3,000 for 27 days |
$0 + $3,000 purchase of
Jan. 5 = $3,000 for 15 days |
| Jan. 20 to Jan. 31 |
$3,000 - $2,000 payment of Jan. 20 = $1,000
for 12 days |
| Calculation of Average Daily Balance |
($0 x 4 days) + ($3,000 x 27 days)
31 days in the billing period = Average daily balance of
$2,612.90 |
($0 x 4 days) +
($3,000 x 15 days)
+ ($1,000 x 12 days)
31 days in the billing period = Average daily balance of $1,838.71 |
| Total Interest Charged |
Average daily balance x Daily interest rate
x Number of days in the billing period
= $2,612.90 x 0.05068% x 31 days = $41.05 |
Average daily balance x Daily interest rate
x Number of days in the billing period
= $1,838.71 x 0.05068% x 31 days = $28.89 |
| Total Interest Saved |
$0 |
$12.16 |
While her savings of $12.16 may not sound like a lot, Mrs. Smith
has actually lowered her February interest charges by 29.6 per
cent. Over time, reducing your interest charges this way can
save you a lot of money, especially if you carry a large balance
every month.
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