Paying Down Credit Card Debt Faster

by Gary Foreman

Paying off a credit card can be a slow, costly process. If you want to pay down credit card debt faster, these strategies can help.

Dear Dollar Stretcher,
Is there any advantage to making more than one (even up to four) monthly payments to my credit card company? I work at several house cleaning jobs for the sole purpose of paying off my credit card. I’m wondering if there would be any interest-savings benefit if I made partial payments at the end of each workweek rather than “saving up” the money for that payment, which is typically made once a month.
Sherry

Sherry’s right. Making two or more monthly payments will reduce the interest expense on most credit card accounts. But before we see how much you’ll save, let’s look at how credit card companies calculate interest. Their chosen method will make a difference in how much you owe and when you owe it.

How Do Credit Card Companies Calculate Interest?

The most common method is “average daily balance.” Each day, your account is credited with any payments received and new charges are added. At the end of the month, the daily balances are averaged, and that amount is multiplied by your interest rate to determine how much interest you owe for the month.

The “adjusted balance” method is skewed in the cardholder’s favor. Any charges made during the billing period aren’t counted until the end of the period. And if full payment is received before the end of the period, no interest is owed.

In the “two-cycle balance” method, two separate average balances are calculated. One is for the current month, and the second is for the prior billing period. They’re combined to calculate the interest owed. Generally, this method leads to a higher balance.

What Is the Difference Between Variable and Fixed Rates?

While we’re talking about credit card interest rates, let’s spend a moment on “variable” and “fixed” rates. A variable loan will change weekly based on some published rate (like the prime rate). A fixed rate is only fixed until the credit card company tells you they’re changing it. All they need is to give you written notice and a 45-day warning. Like your mortgage, a variable rate is best when rates are going down. A fixed rate is better when rates are headed up.

What Is a Tiered APR?

Sherry also will want to know if she’s being charged a “tiered APR” on any of her cards. Cards often offer one low rate for balance transfers, but any new purchases are at a different, higher rate. Another tiered method charges one low rate for balances up to a specified limit. Balances over the limit are charged at a higher rate.

How Do You Calculate Credit Card Interest Expense?

OK, so how much could you save on interest? Let’s walk through the math. If you sent a second payment in the middle of the month, you’d save 15 days’ interest on the amount sent in early. Suppose your interest rate was 14% and you made a $50 payment. If your annual rate is 14%, the rate for fifteen days is .57%. (.14/365 days x 15 days = .0057) You would save $.28 in interest (.0057 x $50).

You can calculate the savings using your numbers, but you’d lose out on any interest (however small) you might be earning in your checking account for the same amount of time. Not very encouraging.

But that doesn’t mean that you can’t do anything to reduce your interest expense. Other strategies could pay off for you.

What Are Some Other Ways To Pay Down Credit Card Debt Faster?

One way to reduce interest expense is to call your credit card company and ask for a lower rate. They’re not obligated to offer you one. But, if you’ve been a reliable customer, a simple phone call could save you money.

You should make sure that tiered accounts aren’t bloating your interest expense. If so, you’ll want to use a different card with a lower rate for new purchases or transfer a higher tier balance to a different lower-rate card.

If you have more than one card, you should pay off the one charging the highest rate first. If you only have one card, you might want to transfer the balance to a new card with a lower rate.

What About Prepayments?

Also, prepayments make a big difference. If she were to add just $10 each month for a year at our 14% rate, she would reduce her interest expense by $29.50 during that year.

The Bottom Line?

Sending in a payment in the middle of the month would reduce some interest expense because you’re borrowing less money for a shorter period. But, unless you can afford to make a significant payment in the middle of the month, you’ll probably save more money by using other techniques.

• What Does My Debt Cost Me?
• Where Should You Start With Debt Repayment? Smallest Bill or Highest Rate?
• How To Stick to a Budget and Still Use a Credit Card
• Escaping Credit Card Debt: $30,000 Conquered
• What Is Your Credit Card’s Effective Annual Interest Rate (EAR)?

Reviewed February 2024

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.