Does Splitting Your Monthly Payment into Two Save, And If So, How Much?

July 10, 2011 12:13 PM

A website I came across recommended paying half your minimum payment on a credit card every two weeks (instead of one monthly payment) in order to reduce your average daily balance. Does this work, and what kind of savings would this yield?

The relevant paragraph:

Divide credit card minimum payments in half and pay that amount twice a month. Interest is calculated based on the average daily balance of your account for the entire month. By making a payment every couple weeks you are reducing that average balance and therefore reducing the finance charges assessed, as opposed to waiting until the end of the month to make a single payment. As an added benefit, splitting your payment into two separate payments helps smooth out the monthly budget as you will not have to come up with an entire payment once during the month, rather half that amount twice during the month (aim for around the time you receive your paycheck).

If you want specific figures to work with, let's say $3,000 at 20%, minimum monthly of $90. These are plucked from the air and not mine, so use better ones if you need to ...

posted by WCityMike to work & money (11 answers total)

My back of the envelope calculatations suggest you can pay off that $3,000 with 50 monthly using once a month payments or 98 biweekly payments (slightly less than 50 months). There's no trick to this - it does work, but you're paying more money (there are 26 bi-weekly periods per year, but only 12 months). This is no different than the fairly common trick of paying mortgage payments bi-monthly rather than monthly.
posted by saeculorum at 12:21 PM on July 10, 2011

Never pay only the minimum amount

(UK site, but this particular article is appropriate worldwide.)
posted by Mwongozi at 12:27 PM on July 10, 2011 [1 favorite]

If you split the $90 into two payments of $45, and pay one at mid-month and one at the end of the month, you end up paying $45 half a month sooner than you would otherwise. That means that each month you save half a month's interest on $45; over the course of the year who save half a year's interest on $45, which is 10% of $45, or $4.50. Barely seems worth the trouble of remembering to pay twice a month instead of once. (And if you pay by checks that you send in the mail the savings are entirely eaten up by the extra postage.)
posted by madcaptenor at 12:36 PM on July 10, 2011

If you pay half your minimum payment every two weeks, then for two weeks of the monthly compounding period, you have a (somewhat) smaller balance that compounds interest charges.

So, in some sense, yes, you would "save" some money by paying half of your minimum payment every two weeks. But in another, more important, sense, this is robbing Peter to pay Paul: you are still incurring interest (and possibly penalties). It is far better to pay off your entire balance in full, every month, than to play games with minimum payments by paying half of them every two weeks.
posted by dfriedman at 12:47 PM on July 10, 2011

No, because most cards now use the sweet-jesus-the-law-allows-that? method of "average daily balance", averaged over a period of one to three billing cycles (aka "months').

I recently got dinged on that (and gave them an earful, to no avail) because part of my payment didn't go through (I paid from two different bank accounts, and one of them had what I will charitably call a "temporary glitch"). I still paid most of the bill (way over the minimum), and paid off the balance a week later when I noticed the problem.

Yet, FOR THE NEXT TWO MONTHS, I had to pay interest on an "average" of around $2400 despite having a zero balance when the next statement came due.
posted by pla at 12:52 PM on July 10, 2011

pla: that's true, but wouldn't the average daily balance be lower with this payment scheme? So it would still help -- although not by much.
posted by madcaptenor at 12:59 PM on July 10, 2011

madcaptenor that's true, but wouldn't the average daily balance be lower with this payment scheme? So it would still help -- although not by much.

Hmm... Let me think this through...

In my case, as I said, a week later I payed my entire outstanding balance and still enjoyed paying interest for the next two months, so it wouldn't have made any difference. That happened because, once I crossed the magical line between "no balance carried over" and letting even a single penny ride, the full force of their usurious interest rates came down on me until their full interest-averaging-window had elapsed.

In the asker's case (the only one that really matters here), where he knows he'll have to pay interest anyway... Well, since he knows he'll have to pay interest anyway, I suppose it should help somewhat (and it might even help more than just the interest over two weeks, if they keep holding his day X balance against him until day X+90).

That said, I suppose it depends on the exact terms of his card. So I guess I should change my original answer to "yes, but read the fine print.
posted by pla at 1:27 PM on July 10, 2011

If you do this, make sure that you do not send in a half-payment until the statement date. If you send it earlier, they will credit it as an extra principal payment on the previous cycle and it will not count toward your minimum due for the current month.

I found this out the hard way. I had been paying on a biweekly basis - way more than the minimum per month, but less than the monthly minimum per payment. I blindly made the payment every payday without checking the balance due. Later I checked my statements and found that I had been charged three late fees over a period of about nine months due to the way the bill due dates fell, even though I had been paying well over the minimum amount per month.
posted by tkolstee at 1:48 PM on July 10, 2011

This is stupid and will make you micromanage and freak out often. Just pay it off 100% every single time the bill comes in. That is how credit cards WORK.

At absolute, total best you would save a few fractions of a percentage point a year. At what cost? Your sanity? Not worth it.

If you're holding a debt right now ("balance" = debt) then pay it off as quickly as you can, as aggressively as you can afford. And then never, ever, ever, ever, (ever), ever carry a balance again. They are in business to take your money. Do not let them. Two monthly payments is not a saving grace; it's a meaningless red herring.
posted by carlh at 1:58 PM on July 10, 2011

It sounds like the credit card version of the biweekly mortgage payment plan. In essence, you are making 13 monthly payments a year, so yes, you will pay your balance off quicker than if you only made 12 payments a year. That being said, as others have noted the interest on mortgages and credit cards is calculated differently, in part because the amount of the loan on your card varies from day to day as you use it while a mortgage is for a set amount and time period. Also, minimum payments are barely higher than interest only payments; it can take decades to pay off the principal and shaving a few months off that is not the way to do it. Here is a calculator demonstrating the folly of making minimum payments; note that the results from it assume that you will stop using your card and not increase the balance owed.
posted by TedW at 2:37 PM on July 10, 2011

If you do this, make sure that you do not send in a half-payment until the statement date. If you send it earlier, they will credit it as an extra principal payment on the previous cycle and it will not count toward your minimum due for the current month.

This was my first thought. If the credit card company gets anything less than the minimum payment in a single check, they are very likely to simply credit it as a partial payment, regarless of how much you may have paid earlier in the month. It's just not worth it.

I agree with carlh. Pay as much as you can to pay down the balance. Don't worry about splitting monthly payments, it's just a distraction.
posted by The Deej at 2:39 PM on July 10, 2011