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Save Money on Your Credit Card Bills

Pay early and pay less! You can save on monthly finance charges if you pay your bill before the grace period begins.

How quickly you can send in your credit card payment will affect your monthly interest charges. In the examples below, sending a payment close to the due date almost doubles the monthly finance charge on your balance.

A Look at Finance Charges

Finance charges are the price you pay for using borrowed (the credit grantor's) money. The timing of when your payment reaches the credit card company can have a significant impact on the amount you pay in monthly finance charges.

Your credit card statement indicates the date your account closes each month and reflects any activity on the account as of that date. The greater the balance on the closing date, the more interest is charged on your account. In the period between the closing date and the due date, any credits (payments) and debits (charges) to the account are calculated, and the closing balance is adjusted. Finance charges are added to the balance, along with any fees you may have incurred, such as ATM fees or cash advance fees.

The time between the bill closing date and the due date on the account is referred to as the grace period. The standard grace period is 20 to 25 days. For example, if the bill closing date on your card is the 10th of the month and your payment is due on the 30th of the same month, the grace period is the 20 days between the 10th and the 30th. If you pay the entire balance by the due date, you won't have to pay additional interest for the charges you made during the month. But if you carry a balance on your credit card, there is no grace period and a finance charge is added as soon as the purchase is made.

Let's look at different examples to see how paying early in the credit card billing cycle reduces the amount of interest charged. The examples below use the Average Daily Balance method of balance computation. This calculation adds together each day's balance (with new charges added and payments subtracted on the day the transactions are posted) and divides the sum by the number of days in the billing period. Many credit card issuers use the average daily balance calculation. It is not the cheapest for the cardholder, but it's not the most expensive either.

Example 1. Payment made later in the billing cycle – Assume the previous balance is $500, with an Annual Percentage Rate (APR) of 18%, a monthly interest rate of 1.5%, and a daily periodic rate of .05%. The calendar shows the transactions and when they occur. Notice that the monthly payment ($400) is posted on the 29th and purchases are charged on the account on the 17th($30) and 25th ($300).

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

Sunday

1
Previous Balance $500

2

3

4

5

6

7

8

9

10
Bill Closing Date

11
Grace Period

12

13

14

15

16

17
$30 Purchase Charged

18

19

20

21

22

23

24

25
$300 Purchase Charged

26

27

28

29
$400 Payment Posted

30
Due Date

 

 

 

 

 

When using the average daily balance computation, the total balance for the month equals the sum of the balances for each day of the billing cycle. Then the total balance is divided by the number of days in the billing cycle ((in this case, 30 days).

Note that the daily balances are calculated based on the series of days a balance is the same (in example 1, the balance is $500 from the 1st through the 16th). As a payment is received, or if another charge is incurred, a new calculation is performed to determine the subtotal balance for that series of days. In Example 1, the average daily balance calculations are:

Day Period
(a)

# of Days
(b)

Current Balance
(c)

Total Balance in Period
(b) ´ (c) = (d)

1-16

16

$500

16 ´ $500 = $8,000

17-24

8

$500 + $30 = $530

8 ´ $530 = $4,240

25-28

4

$530 + $300 = $830

4 ´ $830 = $3,320

29-30

2

$830 + $400 = $430

2 ´ $430 = $860

Total Balance = $16,420      


Average Daily Balance

    = Total of daily balances ¸ # of days in billing cycle
    = $16,420 ¸ 30
    = $547.33

Daily Periodic Rate
Interest Charge

               $547.33 x .0005* = .27

Monthly Interest

               .27 x 30 = $8.21

* To calculate the daily periodic rate, divide the Annual Percentage Rate by 365.

Example 2. Payment made early in the billing cycle – As in the example above, assume the previous balance is $500, with an APR of 18%, a monthly interest rate of 1.5%, and a daily periodic rate of .05%. Purchases are charged on the 17th ($30) and 25th ($300). Notice that the monthly payment ($400) is posted on the 9th, instead of on the 29th. By sending the payment early so it is posted prior to the bill closing date, the interest charged to the account is half that in Example 1.

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

Sunday

1
Previous Balance $500

2

3

4

5

6

7

8

9
$400 Payment Posted

10
Bill Closing Date

11
Grace Period

12

13

14

15

16

17
$30 Purchase Charged

18

19

20

21

22

23

24

25
$300 Purchase Charged

26

27

28

29

30
Due Date

 

 

 

 

 

As explained in the previous example, the average daily balance is calculated as follows:

Day Period
(a)

# of Days
(b)

Current Balance
(c)

Total Balance in Period
(b) ´ (c) = (d)

1-8

8

$500

8 ´ $500 = $4,000

9-16

8

$500 - $400 = $100

8 ´ $100 = $800

17-24

8

$100 + $30 = $130

8 ´ $130 = $1,040

25-30

6

$130 + $300 = $430

6 ´ $430 = $2,580

Total Balance = $8,420      


Average Daily Balance

    = Total of daily balances ¸ # of days in billing cycle
    = $8,420 ¸ 30
    = $280.67

Daily Periodic Rate
Interest Charge

               $280.67 x .0005* = .14

Monthly Interest

               .14 x 30 = $4.21

* To calculate the daily periodic rate, divide the Annual Percentage Rate by 365.

Example 2 demonstrates the positive impact an early payment can have on the daily balances. The only difference between Example 1 and Example 2 is that Example 1's payment is made later in the billing cycle, leaving the opening balance of $500 on the account for a much longer period of time. When the daily balances are calculated, Example 1 has an average daily balance of $547.33, instead of only $280.67 for Example 2.

The sooner you can send in your payment, the lower your monthly finance charge will be. Keep in mind that you do not receive your credit card statement until after the closing date. In order to lower your monthly finance charge on purchases made within the billing period, you must send your payment before the bill closing date (and it must be posted before the closing date), which is before you receive the credit card bill.

See the U.S. Federal Trade Commission tipsheet about Choosing and Using Credit Cards.

This article is one in a series about credit cards. For further information, read the related articles in our Knowledge Center Library.

Take control of your finances with our debt help tools. Use our calculators and budget planner to help you manage your money.



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