Science of Success Schools
Paying down a Credit Card Faster
This is the first in a series of articles/tutorials on getting out of and staying out of debt. I present it first
because it is a relatively simple technique that a lot of people desperately need and can quickly apply to their situation
assuming that they are serious about getting out of debt. Please contact me with any comments, suggestions, and questions
about this article.
(The following strategy focuses on Consumer Credit-Card debt, but the same concept can be adapted to Lines of Credit and business credit Cards.)
I’m not here to lecture, but to provide some help with one of the great problems in today’s world, excessive and unnecessary debt. A lot of people have this problem, want to be out from under it, but don’t quite know how to get debt free with their limited resources. This discussion will help you even if everything you have goes to just staying even. You CAN become debt free, but like losing an extra 5, 10, 30, etc. pounds one has put on, it will take self-discipline.
The good news is that there is a basic mathematical-strategy that will enable you to pay a credit card off faster without paying more to it. In other words, this strategy will enable you to pay off that card faster even if you have very limited resources.
Because this strategy is mathematical in nature it is necessary that you first understand how credit cards really work before proceeding to “The Explanation” of the strategy. In other words, you must understand the answer to the following scenario or the explanation won’t make any sense:
The Scenario:
Suppose you had a credit card that:
First, the finance charge is calculated, in part, from the “Monthly Interest Rate”.
The “Monthly Interest Rate” is always 1/12 of the annual rate, so:
Because this card has been maxed out for a year, the average balance is $10,000.
The “Finance Charge” is calculated by applying the Monthly Interest Rate to the Average Balance, so
The Explanation:
The key to understanding this strategy is to understand what would happen if just one time you were able to pay a single extra dollar ($101.00) against the card. That one extra dollar would break the cycle described above allowing you to eventually pay off the card, but it would take more than 77 years to do it. Why would that single extra dollar break the cycle?
The reason is that the single extra dollar lowered the principle from $10,000 to $9,999 the next month’s so the next month's finance charge is a penny less, or $99.99 and your next $100 payment will pay down the loan by a penny.
I’m going to show you how to pay off that $10,000 without increasing the monthly payments and do it in way less than 77 years.
The “trick” is, rather than paying extra to the card, as we did previously, you loan money to the card for a short period of time like a day, week, or month, but how the heck do you loan money to a credit card?
In order to understand this concept, you've got to open your mind to looking at your card in a different way. If you think about it, a credit card stores money in the form of credit. When you max out your card, there is no money stored there anymore.
Now, in the previous example we paid an extra dollar to the card at which point we were storing a dollar's worth of credit on the card, which we could have used later, if needed, instead of leaving the dollar on the card for the next 77 years. So, in an odd sort of way, you can loan money to the card in the form of a payment, which you can use later, as needed.
Why is this important? Because, as we saw with the dollar, the more we can loan to the card the less interest we have to pay of the next month and the more pincipal our next payment will pay off. So, the more we can loan to the card and longer we can leave the loan there, the quicker the card will be paid off.
The question is, where do you find money in your budget that can be temporarily loaned to the credit card? The answer is, use the money that you normally spend via your Debit Card, cash, or check for things like groceries and gasoline that can be bought with your credit card, instead.
(To make this simple the description will assume the use of a Debit Card. Instructions on how to do this for cash or and actual credit card that is paid off at the end of the billing cycle will follow this explanation.)
How it works:
Suppose you have $500 in your budget for food and gasoline along with the monthly $100 credit card payment discussed above. What if instead of leaving that $500 in your checking account and purchasing that food and fuel with your debit card, we loaned that $500 to the credit card in question and then used that credit card, instead of the Debit Card, for grocery shopping and filling the car at the pump?
For simplicity sake, we’ll suppose that the timing is such that you can send the full $600 to the credit card company at the first of the month. $100 of that is your normal monthly payment, which exactly covers the finance charge for the last month. The additional $500 is a loan to the card, which reduces the card’s balance to $9,500. That sounds pretty good, but you have to remember you only loaned that money to the card so over the month you use that $500 to buy food and gasoline and the balance eventually return to the original $10,000. Was this just an exercise in futility? Not in the least
The key to this strategy is in how credit card companies calculate the finance charge. In most cases, but not all, the finance charge is based on an averaged-out balance rather than the ending balance. In our example, we will pretend that the average balance worked out to be $9,750 based on some part of the $500 loan being on the card throughout the month. The longer money stays on the card the lower the monthly average.
With a monthly average balance of $9,750 the resulting finance charge would be $97.50 (0.01 X $9,750). The bottom line is that even though the $500 was only temporarily on the card it lowered your finance charge that month by $2.50. This means that the next $100 payment will pay the $97.50 finance charge with $2.50 left over to pay against the principle without you putting an extra dime towards paying the card off. It doesn’t sound like much, but how many years did it take to knock the principle down just 2 cents in the previous example.
The repeated use of this technique has a snowball effect for as long as you can go without dipping into the credit line for anything other than a true emergency.
Keep in mind that working this example with only $500 didn’t tie up a single dime out of the budget. You always had access to your money. You didn’t have to rob Peter to pay Paul. You essentially received free money by being smart with how you used what you already had. WHAT A CONCEPT!!!
So, obviously, the more you can loan to the card the faster it will get paid off. A careful inspection of your budget may find even more money that can be loaned to a credit card including things such as your cable or satellite TV payments. Keep in mind that regardless how little time it may be on the card, it still helps drive down that average balance.
Another place to look is at money that your saving up for vacations, emergencies, etc., which could stay on your card for several months and have a significant affect on lowering the monthly average because they are more permanent. I know that the initial feeling is that there is something wrong with putting your savings into your credit card, but think about it.
Think about how much you’d be saving by not paying 12%, or more, on a thousand dollar ballance ($100 per month) as opposed to the less than 1% you would probably be making in a money market or savings account if you leave the $1,000 in the bank. The banks going to pay you $0.83 per month for a grand total of $10 a year). However, that same “$1,000" could save you $1,200 a year and be just as available for an emergency or to other wise use as the money that's in the bank. It would be crazy not to get that money onto your card AND LEAVE IT THERE FOR AS LONG AS POSSIBLE.
It’s mathematics, not magic!
For People who don’t have a Debit Card:
I assume that you have a Credit Card or none of this means anything to you, anyway. Look to your budget and find those items that you already pay with the credit card, pay in cash, or pay by check and determine which of them could be paid via the card and then pre-load those amounts onto the card as soon as possible in the cycle. Then use the card as describe above.
For Businesses:
This technique can be even more effectively applied by a business to reduce existing credit card balances through loaning part or all of the business’ cash flow to a business credit card (don’t commingle funds). This can be especially useful to an entrepreneur who isn’t able to secure a bank loan and is having to rely upon one or more credit cards to run a business. As stated in the paragraph above, if you have a balance on the card(s) learn to pre-load your card(s) rather than waiting to pay after the interest has been accrued.
Finally, this strategy depends heavily on having a working balanced-budget and NEVER dipping into the available credit for anything other than a true emergency.
That’s pretty much it.
Please watch for more tips on debt reduction like knowing what does and doesn’t qualify as a true emergency or let me know that you want to be notified when the next installment comes out. Your email address is safe with us. Check out our policy on that at www.YourAssuranceTeam.com
Copyright © by Brent Kempton 08-02-2014.
This publication may be reproduced and passed around, but only when reproduced in its entirety. This publication may only be distributed at no cost. Any reproduction and/or distribution of this document must contain the copyright as well as the contact information included below.
No fair making money off of my hard work.
Visit the Reading Room at www.YourAssuranceTeam.com for this and related blogs. I have a whole bunch of them ready to be put into circulation.
We’re in the business of helping people to become Self-Reliant, which is to have Financial Literacy, Emotional Resilience, and some personal Leadership Skills. You need to be confident in your abilities, one of which is the ability to provide for your own needs. Contact me at bkempton@yourassuranceteam.com for more information on how I am doing this. Brent Kempton of Your Assurance Team and the Science of Success School
www.YourAssuranceTeam.com
bkempton@YourAssuranceTeam.com
(The following strategy focuses on Consumer Credit-Card debt, but the same concept can be adapted to Lines of Credit and business credit Cards.)
I’m not here to lecture, but to provide some help with one of the great problems in today’s world, excessive and unnecessary debt. A lot of people have this problem, want to be out from under it, but don’t quite know how to get debt free with their limited resources. This discussion will help you even if everything you have goes to just staying even. You CAN become debt free, but like losing an extra 5, 10, 30, etc. pounds one has put on, it will take self-discipline.
The good news is that there is a basic mathematical-strategy that will enable you to pay a credit card off faster without paying more to it. In other words, this strategy will enable you to pay off that card faster even if you have very limited resources.
Because this strategy is mathematical in nature it is necessary that you first understand how credit cards really work before proceeding to “The Explanation” of the strategy. In other words, you must understand the answer to the following scenario or the explanation won’t make any sense:
The Scenario:
Suppose you had a credit card that:
- charges 12% per year
- and is maxed out at $10,000
- 100 months
- 205.3 months
- 437.7 months
- Forever
First, the finance charge is calculated, in part, from the “Monthly Interest Rate”.
The “Monthly Interest Rate” is always 1/12 of the annual rate, so:
- If you have an annual interest rate of 12%, what is your monthly interest rate going to be?
- The answer is 1% per month because 12% divided by 12 months (12%/12mo) is 1% per month.
Because this card has been maxed out for a year, the average balance is $10,000.
The “Finance Charge” is calculated by applying the Monthly Interest Rate to the Average Balance, so
-
If your “Monthly Interest Rate” is 1% per month and your “Average Balance” is $10,000 then what is 1% of $10,000?
- The answer is $100 (.01 X $10,000 = $100.00)
- If your monthly finance charge is $100 and your payment is $100 then your payment is only paying off each month's rent so the monthly principle pay down will be $0 ($100 - $100 = $0.00) and your balance stays $10,000 ($10,000 - $0 = $10,000) meaning this card will never get paid off. (I know that today’s laws require that the minimum payment amounts be enough to pay off the balance, but don’t let that get in the way of understanding this example.)
The Explanation:
The key to understanding this strategy is to understand what would happen if just one time you were able to pay a single extra dollar ($101.00) against the card. That one extra dollar would break the cycle described above allowing you to eventually pay off the card, but it would take more than 77 years to do it. Why would that single extra dollar break the cycle?
The reason is that the single extra dollar lowered the principle from $10,000 to $9,999 the next month’s so the next month's finance charge is a penny less, or $99.99 and your next $100 payment will pay down the loan by a penny.
- 1% of $9,999 is $99.99 ($9,999.00 X .01 = $99.99).
- The following month’s finance charge would be 1% of $9,998.99 which technically would be $99.9899, but really would stay at $99.99 with round-off.
- Within 100 months (8.33 yrs.) enough pennies would be paid in to bring the principle to an even $9,998 making the new finance charge $99.98.
- At 2 cents principle payment per month it would take only 50 months to lower the finance charge down to $99.97. Then no more than 33.3 months to knock the next penny off the balance, then 25 months for the next, and so forth.
- Obviously it would be very slow at first, but the card would eventually be paid off all because of the single extra dollar paid against the principle way back in the begining.
- Don't let the above discourage you, our method is much faster.
I’m going to show you how to pay off that $10,000 without increasing the monthly payments and do it in way less than 77 years.
The “trick” is, rather than paying extra to the card, as we did previously, you loan money to the card for a short period of time like a day, week, or month, but how the heck do you loan money to a credit card?
In order to understand this concept, you've got to open your mind to looking at your card in a different way. If you think about it, a credit card stores money in the form of credit. When you max out your card, there is no money stored there anymore.
Now, in the previous example we paid an extra dollar to the card at which point we were storing a dollar's worth of credit on the card, which we could have used later, if needed, instead of leaving the dollar on the card for the next 77 years. So, in an odd sort of way, you can loan money to the card in the form of a payment, which you can use later, as needed.
Why is this important? Because, as we saw with the dollar, the more we can loan to the card the less interest we have to pay of the next month and the more pincipal our next payment will pay off. So, the more we can loan to the card and longer we can leave the loan there, the quicker the card will be paid off.
The question is, where do you find money in your budget that can be temporarily loaned to the credit card? The answer is, use the money that you normally spend via your Debit Card, cash, or check for things like groceries and gasoline that can be bought with your credit card, instead.
(To make this simple the description will assume the use of a Debit Card. Instructions on how to do this for cash or and actual credit card that is paid off at the end of the billing cycle will follow this explanation.)
How it works:
Suppose you have $500 in your budget for food and gasoline along with the monthly $100 credit card payment discussed above. What if instead of leaving that $500 in your checking account and purchasing that food and fuel with your debit card, we loaned that $500 to the credit card in question and then used that credit card, instead of the Debit Card, for grocery shopping and filling the car at the pump?
For simplicity sake, we’ll suppose that the timing is such that you can send the full $600 to the credit card company at the first of the month. $100 of that is your normal monthly payment, which exactly covers the finance charge for the last month. The additional $500 is a loan to the card, which reduces the card’s balance to $9,500. That sounds pretty good, but you have to remember you only loaned that money to the card so over the month you use that $500 to buy food and gasoline and the balance eventually return to the original $10,000. Was this just an exercise in futility? Not in the least
The key to this strategy is in how credit card companies calculate the finance charge. In most cases, but not all, the finance charge is based on an averaged-out balance rather than the ending balance. In our example, we will pretend that the average balance worked out to be $9,750 based on some part of the $500 loan being on the card throughout the month. The longer money stays on the card the lower the monthly average.
With a monthly average balance of $9,750 the resulting finance charge would be $97.50 (0.01 X $9,750). The bottom line is that even though the $500 was only temporarily on the card it lowered your finance charge that month by $2.50. This means that the next $100 payment will pay the $97.50 finance charge with $2.50 left over to pay against the principle without you putting an extra dime towards paying the card off. It doesn’t sound like much, but how many years did it take to knock the principle down just 2 cents in the previous example.
The repeated use of this technique has a snowball effect for as long as you can go without dipping into the credit line for anything other than a true emergency.
Keep in mind that working this example with only $500 didn’t tie up a single dime out of the budget. You always had access to your money. You didn’t have to rob Peter to pay Paul. You essentially received free money by being smart with how you used what you already had. WHAT A CONCEPT!!!
So, obviously, the more you can loan to the card the faster it will get paid off. A careful inspection of your budget may find even more money that can be loaned to a credit card including things such as your cable or satellite TV payments. Keep in mind that regardless how little time it may be on the card, it still helps drive down that average balance.
Another place to look is at money that your saving up for vacations, emergencies, etc., which could stay on your card for several months and have a significant affect on lowering the monthly average because they are more permanent. I know that the initial feeling is that there is something wrong with putting your savings into your credit card, but think about it.
Think about how much you’d be saving by not paying 12%, or more, on a thousand dollar ballance ($100 per month) as opposed to the less than 1% you would probably be making in a money market or savings account if you leave the $1,000 in the bank. The banks going to pay you $0.83 per month for a grand total of $10 a year). However, that same “$1,000" could save you $1,200 a year and be just as available for an emergency or to other wise use as the money that's in the bank. It would be crazy not to get that money onto your card AND LEAVE IT THERE FOR AS LONG AS POSSIBLE.
It’s mathematics, not magic!
For People who don’t have a Debit Card:
I assume that you have a Credit Card or none of this means anything to you, anyway. Look to your budget and find those items that you already pay with the credit card, pay in cash, or pay by check and determine which of them could be paid via the card and then pre-load those amounts onto the card as soon as possible in the cycle. Then use the card as describe above.
For Businesses:
This technique can be even more effectively applied by a business to reduce existing credit card balances through loaning part or all of the business’ cash flow to a business credit card (don’t commingle funds). This can be especially useful to an entrepreneur who isn’t able to secure a bank loan and is having to rely upon one or more credit cards to run a business. As stated in the paragraph above, if you have a balance on the card(s) learn to pre-load your card(s) rather than waiting to pay after the interest has been accrued.
Finally, this strategy depends heavily on having a working balanced-budget and NEVER dipping into the available credit for anything other than a true emergency.
That’s pretty much it.
Please watch for more tips on debt reduction like knowing what does and doesn’t qualify as a true emergency or let me know that you want to be notified when the next installment comes out. Your email address is safe with us. Check out our policy on that at www.YourAssuranceTeam.com
Copyright © by Brent Kempton 08-02-2014.
This publication may be reproduced and passed around, but only when reproduced in its entirety. This publication may only be distributed at no cost. Any reproduction and/or distribution of this document must contain the copyright as well as the contact information included below.
No fair making money off of my hard work.
Visit the Reading Room at www.YourAssuranceTeam.com for this and related blogs. I have a whole bunch of them ready to be put into circulation.
We’re in the business of helping people to become Self-Reliant, which is to have Financial Literacy, Emotional Resilience, and some personal Leadership Skills. You need to be confident in your abilities, one of which is the ability to provide for your own needs. Contact me at bkempton@yourassuranceteam.com for more information on how I am doing this. Brent Kempton of Your Assurance Team and the Science of Success School
www.YourAssuranceTeam.com
bkempton@YourAssuranceTeam.com