Cutting Credit Costs: Pay Credit Card Bills Early

This article answers questions about paying credit card bills early and how it can save money.
Cutting Credit Costs: Pay Credit Card Bills Early - Articles

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Question

I’m confused. One source says I should really be concerned about the annual percentage rate for my credit cards and another source recommends paying bills early in the billing cycle to save money. Which source is correct? Does it really matter when I pay my credit card bill as long as it’s paid by the due date?

Answer

Unlike “one-size-fits-all” clothing, the best advice about credit cards really depends on many personal factors including how you use the card and your repayment habits. Both sources have some truth and useful points.

  1. If you carry a balance on your credit card, the lower the annual percentage rate (APR) of your card, the less you will pay in interest or finance charges during a given year. In short, if you never pay your bill in full and other features of several cards are the same, the one with the lowest interest rate will save you the most money over time.
  2. If you always carry a balance, making your monthly payment early in the billing cycle (even before the stated due date on the billing statement) will also save you money. Why? Because most credit card issuers use the average daily balance method to figure monthly interest or finance charges. If you make your monthly payment early in the billing cycle, you reduce the daily balance for more days in that cycle. This also reduces the total balance used to figure the average daily balance for that month. See examples below to see how paying early in the billing cycle reduces the monthly interest charges.
  3. If you pay your monthly bills in full each month by the due date, you will avoid all interest charges.

Example 1. Credit Card Changes and Interest when Monthly Payment Is Made Early in the Billing Cycle.

[previous balance (May) = $500, APR = 0.18%, and monthly interest rate = 1.5]

JuneJuneJuneJuneJune
17131925: $300 furniture
28142026
39: $400 payment152127
410162228
51117: $30 prescription2329
612182430

Average Daily Balance Calculations

Date (a)# of Days (b)Current Balance (c)Total Balance in Period (b) x (c) = (d)
June 1-885008 x 500 = 4,000
June 9-168500-400 = 1008 x 100 = 800
June 17-248100 + 30 = 1308 x 130 = 1,040
June 25-306130 + 300 = 4306 x 430 = 2,580
Total Balance = $8,420

Average daily balance = total daily balances/number of days in billing cycle = $8,420/30 = $280.67

Interest charge = $280.67 x 0.015 = $4.21

Example 2. Credit Card Changes and Interest when Monthly Payment is Made Late in the Billing Cycle.

[previous balance (May) = $500, APR = 0.18%, and monthly interest rate = 1.5]

JuneJuneJuneJuneJune
17131925: $300 furniture
28142026
39152127
410162228
51117: $30 prescription2329: $400 payment
612182430

Average Daily Balance Calculations

Date (a)# of Days (b)Current Balance (c)Total Balance in Period (b) x (c) = (d)
June 1-61650016 x 500 = 8,000
June 17-248500 + 30 = 5308 x 530 = 4,240
June 25-284530 + 300 = 8304 x 830 = 3,320
June 29-302830 - 400 = 4302 x 430 = 862
Total Balance = $16,420

Average daily balance = total daily balances/number of days in billing cycle = $16,420/30 = $547.33

Interest charge = $547.33 x 0.015 = $8.21

Prepared by Cathy Faulcon Bowen, associate professor, Department of Agricultural and Extension Education.

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