Scheduling Payments

[Anonymous]

This really isn't about FICO scores but about credit card payments in general.  If I am carrying a balance, which of the following scenario would cost less overall?

The statement closes on the 22nd of each month and is due on the 12th of the following month.  Interest is 3.99% APR.  The balance is 11.5K so the minimum due the first month should be $230.  I will be paying $240 each cycle regardless of the minimum due.

Scenario 1) Pay the $240 on the 11th (right before it's due)

Scenario 2) Pay the $240 on the 23rd (right when it closes)

Scenario 3) Pay $80 on the 23rd, 30th, and 7th (spread them out!)

My instinct is that spreading out the payments continually lowers the balance and therefore the amount of interest generated, but if I paid the full amount the day after the statement closes, it would have the lower balance for the whole month.

Any ideas how I could model such a scenario?  All the spreadsheets I found are monthly.  Thanks!

Message Edited by Mike14 on 10-07-2008 04:13 PM

[Anonymous]

Credit cards (typically at least) use the Average Daily Balance method to calculate interest charges.  Therefore the EARLIER you can make each payment, the better, as each following day would have a lower balance if you made the payment sooner.

So as soon as you have the money available, pay the card to minimize average daily balance and therefore minimize interest paid.  Delaying the payment will only tack on additional interest charges.

[Anonymous]

Thanks for the reply.  I understand about average daily balances, so scenario 1 is definitely out.  So you're saying that it would be better to pay the full minimum as soon as the statement is cut, rather than spread that out over the three weeks between the closing date and the due date?

As some additional background, I'm using the card to refinance a car loan, going from 9.24% to 3.99%.  My payment on the car loan was $235, but I've been paying $60 on the 1st, 8th, 15th, and 22nd (and a few times on the 29th).  I did this so much (and a few entire extra payments) that my next payment isn't due until January (but interest will keep accruing, so I'm gonna keep paying!).  This probably won't work with the CC, as they'll want the minimum by the due date, but AFTER the statement cuts, not like the loan with only needs the full amount by the due date.

[Anonymous]

The math of averages makes it favorable to pay the money as soon as you have it available.  The date the statement posts really becomes irrelevant.

If you have $x available every paycheck, pay that amount as soon as possible in order to minimize interest charges.

Any day you delay paying is an additional day you have to pay interest on that amount that you COULD have paid down.  There is therefore no benefit mathematically to waiting to pay the money to the CC.

If you have $240 available on the 23rd, then pay the full amount that day to minimize interest charges.  If you have some of the $240 available BEFORE the 23rd, then go ahead and pay it earlier than the statement cuts.  

It is mathematically advantageous to pay the money as soon as possible.

To look at a quick example, say the statement posts on the 23rd saying you have $1000 balance, and you have $240 available at that moment you can use to pay it down.

If you follow Scenario 3, you have a $920 balance on the 23rd through 30th, a $840 balance on the 30th through 7th, and a $760 balance on the 7th through 23rd.

Whereas with Scenario 2, you immediately pay down so you have a $760 balance on the 23rd through 23rd of the following month.  Lower balance on more days means lower average daily balance and therefore lower interest charges.

On the other hand, if Scenario 3 means you are "saving up" money to make a single payment when you could have paid some down BEFORE the new statement cuts, then it makes more sense to pay the money before the 23rd (i.e. paying money towards the previous statement), because you are paying each bit of money AS SOON as you have it available to pay.

[Anonymous]

That's pretty much what I was thinking....  The only thing is that any money I pay before the statement cuts goes to the current balance, and once it cuts, I'll owe the minimum all over.  So if I paid $240 on the 11th, right before it closes, once it closes, I'd have to pay another $240 (give or take) before the due date, or I'd default and lose the 3.99% (and other Bad Things).

I think I'll pay the day after the statement cuts, and as I get any "extra" money .  Thanks for your input!

Message Edited by Mike14 on 10-07-2008 06:37 PM

[Anonymous]

Exactly.  If you know you'll have a consistent amount available monthly, then it makes sense to pay it as soon as possible (before the statement cuts if possible).  But yes, you'll need to make sure that you'll have the money to pay again a month later (before the next statement cuts).

Mathematically you'll pay more interest if you wait a few extra days to pay, but if that's balanced with any concern over not having the full amount to pay NEXT month, then certainly you don't want to get into a position where you'd be missing any minimums due within any payment cycle

[Miner]

You know, with my CU, if I pay online 1 second before the statement cuts, even though its a week after the due date, that payment is considered to apply for the previous billing cycle.  I know since I have paid them several times that late on a bill without them giving me a late fee.  So trying that method to pay early doesn't work with every CCC.  Unless you know differently, wait until the statement is cut.

[Anonymous]

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@Miner wrote:

You know, with my CU, if I pay online 1 second before the statement cuts, even though its a week after the due date, that payment is considered to apply for the previous billing cycle.  I know since I have paid them several times that late on a bill without them giving me a late fee.  So trying that method to pay early doesn't work with every CCC.  Unless you know differently, wait until the statement is cut.

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Just to clarify - I'm NOT saying that if you pay before a statement cuts it then will credit for THAT statement - it likely will count for the PREVIOUS statement.

However, if you know that in a month you'll still have the money to pay again (for the statement that's about to post - so you won't miss paying its minimum), then it is mathematically advantageous to send money in as soon as you have it available (knowing of course that you'll still have to pay the next minimum before it comes due).

If the monthly availability of money to pay is less certain, then it may make sense to wait.  But mathematically interest charges are reduced by sending as much as money as possible as soon as possible.

[Anonymous]

I've just been paying $240 every month the day after the statement cuts.  I don't even know what the minimum is anymore.  By the time it would show online, the scheduled payment has already gone through so I just see a $0, and I never bother to look at the paper statements anymore.