Interesting Information about Credit Cards and Mortgages

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Let me start off by saying that I am not a financial advisor,  nor am I licensed to give financial advice. This blog is the result of a conversation that I had, and before you make any action based upon my advice,  I would advise you to talk to your lender.

I was talking to a employee of a credit card company today, and she gave me this information, which I hope is correct. I thought that it might be of interest to some of you. I’m using round numbers here for the purposes of clarity.

Suppose you owe a credit card company $1000, and you have a certain annual percentage rate (APR). Make up any APR you want.

Now, although your indebtedness is subject to an annual percentage rate (APR), the credit card company does not calculate your interest annually. The credit card company calculates your interest daily. They take your annual rate and divide it by either 365 or the number of business days in the year, and they multiply your balance owed by that fractional number and charge you that amount every day.

But you don’t get a bill every day; you get a bill every month. So you are charged interest daily and billed monthly.

Suppose that the combination of your $1000 indebtedness and your APR, whatever it is, gives you a monthly payment of $40, which is due on the first of the month. Let’s say that of that $40, $30 is interest and $10 is principle. Now, I’m just making up numbers, but I think that the principle that I am about to demonstrate is correct.

In reality, the credit card company is charging you $1 interest per day, which amounts to $30 per month, and the payment is due on the 1st. Yes, I know that some months don’t have 30 days, but just suppose, for purposes of discussion, that they all do. Don’t worry about that. Just follow along.

So, on the April 1st, you make your payment. You owed the credit card company $1000, but you paid $30 in interest and $10 in principle, and so now you owe the credit card company $990, rather than $1000.

Suppose you get a bill on April 2nd. The bill will be for $40, which is, $30 in interest and $10 in principle.

The credit card company is billing you $30 in interest, because you are going to owe $30 in interest on May 1st, when the bill is due. Because interest is calculated daily, on April 2nd, you actually only owe the credit card company $1 in interest. On April 3rd, you owe the credit card company $2 in interest. On April 4th, you owe the credit card company $3 in interest. And so on.

But suppose on April 2nd, you pay the credit card company $41. Yes, this is an additional payment. Of this payment, you only owe $1 in interest, which means that $40 of your payment goes to the principle.

So, rather than owing the credit company $991, you now owe them $991-$41, which is $950.

But the most important thing is that since you have been billed and have already paid the bill, you are not charged any more interest until you are billed again.

Since interest is calculated daily and billed monthly, interest stops being calculated when you pay your bill. If you pay on the due date, you pay a month’s worth of interest and the interest calculations immediately start again. If you pay on the day the bill is issued, you pay a day’s worth of interest and your interest stops being calculated until you are billed again.

Now, usually, credit card companies don’t bill you the day after your payment is due, so you may actually pay four or five days interest, but don’t worry about that. I’m using round numbers for clarity. Just understand the principle.

So, you owe $950 until the next due date, May 1st. You don’t have to pay a bill on that date, because you have already paid it. On the day after your next due date, May 2nd, you get another bill and interest starts accruing again, so you owe $951. Suppose you make a $41 dollar payment on that date. Now, the interest on your May 2nd payment was $1, which means that the principle is $40. Now, your indebtedness is $910.

And you have already paid the bill for the month, no more interest accrues until the next bill is issued. Interest is calculated daily and billed monthly.

So, regardless of your balance and your annual percentage rate (APR), by making one extra payment and then paying the next bill and all the following bills on the day the bill is issued rather than the day the bill is due, you can save a lot of money, unless your interest rate is 0%. At least, that’s what I was told.

If you are carrying a credit card balance, call your credit card company or your financial advisor and see if I’m right. It might save you some money.

Call your mortgage company as well. This strategy, or something similar, may work for your mortgage as well.

interest rates, payments