Paying off credit card debt often feels like a never-ending cycle of taking two steps forward and one step back. You might be chipping away at your debt with your monthly payment, but you’re also simultaneously being charged interest every time you don’t completely pay off your balance.
But there is a small change you can make to how you pay your credit cards in order to reach that coveted zero balance a little sooner: making bi-weekly payments. Not only will this help you pay less in fees, it can keep you from spending your excess funds in unnecessary ways instead of applying them to your debt.
Here’s how it works
Making biweekly payments doesn’t increase the amount you are applying towards your debt each month, it simply splits that one monthly payment into two payments applied every two weeks. This equals out to 26 half payments – or 13 full payments made each year, compared to 12 full payments made on a monthly payment plan.
It might seem strange that such a minor change could have any kind of significant impact on debt, but there are plenty of reasons why this is a great way to go about it.
It applies an extra payment each year to your debt
This plan allows you to apply one extra payment each year to your debt – without feeling the financial impact. One extra payment each year takes a big chunk out of the total amount of interest paid while also cutting down the repayment time.
Here’s an example:
Your credit card has an interest rate of 15%, a balance of $15,000 and you are currently paying $300 a month. Normal monthly payments put the total amount paid (with interest) at $23,834.58. It would take 6 years and 8 months to reach a zero balance.
Biweekly payments, on the other hand, would lower the total amount paid to $22,709 and the repayment period would be only 5 years, 11 months. So not only would you save over $1,000 in interest, but you’d also be debt free 9 months earlier.
(You can calculate the difference for yourself here.)
It lowers the average daily balance on your credit cards
The interest credit card companies charge is calculated on a daily basis and will be higher the less often you put money towards your balance. Therefore, it’s always better to make smaller payments more often then making one payment and waiting until you receive your next statement.
For example, say there are 28 days in your billing cycle and you keep your balance at a steady $1,000 until making a $200 payment on the 28th day. Your average daily balance would be $992.86. Say instead that you make a $100 payment on the 15th day and another $100 payment on the 28th day. While the same amount went towards your debt, the average daily balance you are getting charged interest on dropped to $946.43 – simply because you split your payment in half.
(You can calculate your average daily balance here.)
It can even out cash flow on a biweekly paycheck schedule
Let’s face it – while the frequency in which you receive your paychecks doesn’t change what you earn, it can certainly change the way you manage your finances. Getting paid biweekly sometimes means compartmentalizing your bills into different times of the month – rent will be paid with the first paycheck, credit card bills with the second, etc.
The problem with managing your money this way is cash flow isn’t always steady, and extra cash is either hard to find or too easy to throw towards unnecessary purchases. By stabilizing your bill payments and keeping expenditures the same for each paycheck, you can get a better grasp on exactly where your money is going and how much is actually expendable (if any).
How to go about it
If you’re ready to jump on the biweekly bandwagon, here are a few tips to get you started:
Set up an account online with your credit card company.
Because your credit card company will be sending you monthly statements, not biweekly statements, it’s much easier to pay online rather than by check. This will allow you to pay as often as you like.
Keep payment amounts the same.
Over time, it might be tempting to change your payment size (i.e. making one larger payment and one smaller payment). While this is great if you want to increase both biweekly payments, this method works best when payments are kept steady and split directly in half.
It can be hard to adjust to a new payment schedule if you are used to simply paying bills only when they are due. Therefore, it’s important to create a method that works for you. This might mean making your payment on the same day, or the day after you receive your paycheck – another great way to curtail unnecessary spending.