I wrote up this little guide, figuring it might help some people out, let them see things from a different perspective, and save them a few bucks in the process...
How to pay off a balance faster, while immediately improving scores by reducing UTI%.
This is a strategy for low to moderate credit card balances that are less than or equal to ones monthly income.
For example - you have a credit card with 24% interest that has a 2k limit and is maxed out at Christmas time, and your monthly net income is 2K, and the monthly budget is $1900. The extra $100 is applied to the card each month. It will take over 2 years to pay the balance off, you'll pay upwards of $400 or more in interest, and your FICO scores will suffer signifigantly in the first year of the payment schedule because of the high UTI%. This is the payment strategy most people use. It works like this:
Lets assume the due date is the 1st and the statement closes the 3rd day of the month and the person is paid $1000 on the 1st and 15th of the month.
We'll sart out at the first of the month, Jan 1, the $100 payment from last month has already been paid, so the current balance is $1900. Normally they would begin paying their bills and making their monthly purchases with their paycheck, the statement would close Jan 3 and $40 interest will be added to their balance, for a total of $1940. On Jan 15th they continue this, spending $900 and make a $100 payment on the card, reducing the balance to $1840. When the next stament closes on Feb 3, another $38 interest will be added to the balance, bringing it back up to $1877, another mid-month payment on Feb 15 reduces it to $1777, and on March 3rd another $37 in interest is added, bringing the balance to $1814. At this point, three payments of $100 have been made (in Dec, Jan, and Feb), but only $186 of the balance has been paid down - $114 has been eaten by Interest.
Here is a much better, much faster way - and it doesn't cost you a dime. All you really have to do is delay spending any money for three days at the beginning of the month.
Jan 1st arrives, instead of paying monthly bills with our $1000 paycheck, we pay $1000 on the card balance, bringing it down to $900, and on Jan 3rd, the statement closes and $40 interest is added for a Statement balance of $940. Then after the statement closes we use the card for all of our monthly spending, cutting it off when the balance hits $1940 (less if possible) until Jan 15th, when we pay another $1000 on it, bringing it back down to $940. Because the last statement balance was $940, and we have paid $1000 on it before the due date, there will be no interest added at the statement closing. We use the card for the second half of our monthly spending, $900, bringing the balance back up to $1840, and on Feb 1st, again we pay $1000 on it, bringing the statement balance down to $840. We pay the first half of February's expenses on the card, limiting it to $1840 by Feb 15th, when we drop another $1000 on it, to bring it down to $840. Second half of Feb adds another $900 in monthly spending, bringing it up to $1740 and on March 1st, we pay it down to $740. Again, because more than the previous Statement balance has been paid, no interest will be added on March 3rd, for a statement balance of $740. You can see that by October 3rd our statement balance will show an "ideal" UTI% of $40. And we've done it in only ten months vs. 24+ months with the "conventional" payment method, all without sacrificing anything, no trimming the budget, or otherwise trying to find extra dollars each month. AND at the outset, we reduced our UTI% from 90%+ to under 50% in the VERY FIRST MONTH. Scoring increases early on make CLI's much more likely within the first 6 months, and if it happens to be a reward card like a Capital One QS/QS1 - you can chop off two months and finish in August if the rewards are used to reduce the balances, or you can just treat your self to a nice night out, with nearly $300 in rewards.
Yes, it takes planning. And yes, it take some discipline, but virtually ANYONE can do this, if they choose to - and save themselves a boatload of money in the process.
Cheers everyone!
