# Cutting Credit Costs: Pay Credit Card Bills Early

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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?

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]

 June June June June June 1 7 13 19 25: \$300 furniture 2 8 14 20 26 3 9: \$400 payment 15 21 27 4 10 16 22 28 5 11 17: \$30 prescription 23 29 6 12 18 24 30

### Average Daily Balance Calculations

 Date (a) # of Days (b) Current Balance (c) Total Balance in Period (b) x (c) = (d) June 1-8 8 500 8 x 500 = 4,000 June 9-16 8 500-400 = 100 8 x 100 = 800 June 17-24 8 100 + 30 = 130 8 x 130 = 1,040 June 25-30 6 130 + 300 = 430 6 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]

 June June June June June 1 7 13 19 25: \$300 furniture 2 8 14 20 26 3 9 15 21 27 4 10 16 22 28 5 11 17: \$30 prescription 23 29: \$400 payment 6 12 18 24 30

### Average Daily Balance Calculations

 Date (a) # of Days (b) Current Balance (c) Total Balance in Period (b) x (c) = (d) June 1-6 16 500 16 x 500 = 8,000 June 17-24 8 500 + 30 = 530 8 x 530 = 4,240 June 25-28 4 530 + 300 = 830 4 x 830 = 3,320 June 29-30 2 830 - 400 = 430 2 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.