If you have a credit card balance that’s causing you some pain then you’ll be interested to know about this counter-intuitive credit card debt payment strategy I came up with that will help you pay off your credit card and will save you money.
I’m about to share this with you and show you in an example what kind of savings you are looking at!
Before we start, this debt payment strategy requires a certain degree of self-control, but there are things you can do to help if you’re not the best at restraining yourself when it comes to holding your credit card in your hand…in a shop.
Why is this method so counter-intuitive?
Well, I’m going to tell you to use your credit card…for everything.
That sounds a little crazy, I know.
Just stick with me. I didn’t call it the counter-intuitive method for nothing.
In order to pay off your credit card, you first need a budget
What you need to do first for this strategy is to implement a family budget or weekly cash flow. If you don’t know how to do that then read my post about how a family budget helped me pay off my credit card, then come back.
You need to have these things down before you progress:
- understand where your money is coming from
- understand where your money is going to, as in what you are spending it on
- make modifications to your budget so that you aren’t spending more than you are earning
- made as many reductions to give you the maximum amount of surplus cash to put toward debt repayment
- set down the resolve to live by that budget no matter what
The notion of this strategy is that you’re going to pay all your income onto the credit card when you receive it and then use the credit card for all your living expenses. This will save you a ton of interest, and I’ll show you how.
This is best illustrated by an example.
Before we start, for all you maths heads out there, this is something of a loose example.
Let’s say you have a credit card bill of $5,000 and you’re paying 20% interest per annum on that credit card every year. That roughly equates to about $84 a month.
You are paid $1,500 fortnightly from your job, with the first pay day at the start of the month. Every two weeks you have $1300 in living expenses which leaves you with a surplus of $200 to pay off your credit card.
Now, in the norm, you’d probably leave your $1300 in your bank account and pay $200 on your credit card.
If you check with your credit card provider, you’ll likely find that most credit cards calculate interest on the balance at a daily rate that equates to the annual percentage rate.
So in our example, where you owe $5,000, you’ll be paying $2.74 per day in interest.
How paying off your credit card looks, in the norm
So because you did your family budget. You did, right? And you are determined to pay off your credit card, you pay off $200 immediately. This reduces your balance to $4,800 and your daily interest repayments to $2.63. Here’s my math:
(($4,800 / 100) * 20[% interest]) / 365 days = $2.63 per day
So for the following 14 days, you will save, or reduce, your daily interest by 13 cents per day. Giving you a total of:
14 days * 13 cents = $1.82
After your second payday, a fortnight later, you pay off another $200. Here we go:
(($4,600 / 100) * 20[% interest]) / 365 days = $2.52 per day
Let’s assume we have these savings until month end, a further 16 days for a 30 day month, and your savings on your original interest payments would be 22 cents per day:
16 days * 22 cents = $3.52
So in total, your reductions in interest payments, through the normal way you tend to pay off your credit card would be $5.34 for that month.
We can do better than that!
How to pay off your credit card the counter-intuitive way
If you use your entire income to pay down your card by $1,500 on the first pay day (day 1) your core balance will drop to $3,500. When we calculate your daily interest on that balance it looks like this:
(($3,500 / 100) * 20[% interest]) / 365 days = $1.91 per day
That brings your daily interest payments down to $1.91 per day.
That’s 82 cents a day less than you were paying on your original balance!
Compare and contrast that to the 13 cents you were saving using the “normal way” and you can see a big difference already, right?
Now, it’s obvious that you’re not going to maintain that balance for the full month because you have to live and the idea behind this debt repayment strategy is that you’re going to be living on your credit card.
However, there is often a further advantage of using this method. Generally, perhaps not always, purchases you make on your credit card are not normally charged interest for the first 30 days, or until you get your next monthly statement – check that out with your credit card provider as well.
This means that your living costs are going to be interest-free for 30 days, at most. That’s a win!
Which means you’re going to get the full benefit of that massive saving ALL MONTH.
Let’s get back to our example because you get paid fortnightly you’ll reap this reduction in interest rates for 14 days, which equates to $11.48.
82 cents * 14 days = $11.48
The following pay day, 14 days later, you throw all your income onto the balance again, reducing your balance to $2,000, in turn reducing your daily interest to just $1.09.
(($2,000 / 100) * 20[% interest]) / 365 days = $1.09 per day
That’s going to give you a daily saving rate of $1.65 over the original daily interest rate!
Again, assuming a 30 day month, for the sake of simplicity, that would give you the remaining 16 days at that rate, saving you $26.40.
16 days * $1.65 = $26.40
In total, by paying off your card in this way you will save a total of $37.88 in that month.
That’s a lot better than $5.34, isn’t it?
You’re saving $32.54 in interest each month by comparison.
How this pans out in the long-term
As you get to the next month, because you’ve been living on your credit card using it to pay for things like groceries and fuel, assuming you keep to your budget, the balance on your credit card that is charged will increase back to $4,600.
What this credit card debt repayment strategy is doing is saving you money each month.
That being the case, if you’re only paying down $200 a month, it’s going to take you 25 months to pay off $5,000.
However, by using the counter-intuitive method you’ll have it paid off quicker because there will be less compounding interest.
Chances are if you only have $200 surplus each month for repaying your credit card then you aren’t accounting for the interest which will mean it’ll probably be a lot more than 25 months to pay off this balance at $200 a month.
Long term, though, you’re going to save a lot of money. I’d estimate it’ll save you $500 at least.
(If you’re a math head, feel free to do the figures on this and let me know)
What can go wrong
I said earlier, this strategy can go horribly wrong if you don’t have a budget, you don’t keep to that budget and you aren’t utterly determined to avoid using your credit card for things outside of your budget.
I’ve used this method. It works. But it takes real self-control.
It is not giving you permission to use your credit card!
You’ll likely have these weak moments whether you have a bank debit card or a credit card and so those moments are weakness are really about your resolve to change your impulsive habits. Those moments when you feel like a $5 coffee, you have your credit card in your hand, but you know it’s not in your budget.
You’ll consider it an easier choice if it’s on credit. Instead, look at it this way, it’ll bite you later.
Learn to walk away!
What can go right
On the plus side. I guarantee you, that if you can do this religiously for one full month, or two, and then compare the interest charges on your previous credit card statements it will spur you on.
If you’re doing well with your budget, and you find yourself being spurred on by the savings you are making, you may start to make additional payments. When paying off my credit card I found that as I got closer to reaching my goal I worked harder to find further savings which gave me surplus cash to pay down my credit card faster.
Give it a go – pay off your credit card faster
This method will only work for credit card debt because you have to use that card for your budgeted daily expenses. It’s a fantastic but often unforeseen way of paying down a credit card at a faster pace.
Most importantly, it keeps money in your pocket rather than the banks!
Give it a go and let me know how you get on. If you do happen to give it a try please share what kind of savings you are making month to month using this method by dropping a note in the comments.