It's amazing! Not only do you save $1,000 in interest, you cut four months off of your repayment schedule by paying bi-weekly! The upshot of paying bi-weekly is that you end up sending in just $67 a month extra. Of course, I don't encourage anybody to make just the minimum payment. This strategy works even better if you pay more. The best plan of all is to keep making the same size payment even as the minimum payment required goes down.
Now, here's the exciting part. There's another factor at work here that I haven't even included in the math because, frankly, I'm not sure how to do the calculation. By making one of your payments earlier in the billing cycle, you are short-circuiting some of the credit card company's interest charges. How? Because credit card companies charge interest every day of the billing cycle. By paying some principal early in the cycle, you are reducing the average daily balance that interest is based on!
Using the 14 day payment method is easy with online, automated banking. Just make sure your bank won't fine you for not paying the entire minimum balance on the due date, since that's what banks are used to. Some people send small amounts even more often. If you do that, check to see if your bank limits the number of payments you can make per month. The excellent Web site CreditCards.com keeps track of these rules in its section on "micropayments." Click here to read the rules.
And now a fast-lane strategy for paying off credit card debt that some will find obvious and others will find sacrilegious. I know lots of smart people who have a good-sized savings account and credit card debt. That is just dumb. Oh, did I say that out loud? I know, I know, people feel it's important to save for emergencies. Trust me, credit card debt is an emergency. It is sapping your financial strength. You can instantly make a "profit" by using low-interest savings to pay off high interest credit card debt.
If your savings account yields 2 percent interest and your credit card charges 17 percent interest, you make a 15 percent "profit" by using the savings to pay off the debt. Money managers would kill to make that kind of gain in the stock market! Here's how the numbers would play out with a balance of $10,000.
Using Savings to Pay $10,000 Debt
Rate ............................... Interest
Credit card debt @17 percent: $1,700 charged
Savings account @ 2 percent: $200 earned
SAVINGS = $1,500
If these numbers didn't convince you and you are clinging to the idea that you need a large savings account in case of an emergency, then think of it this way: take the sure savings and gamble on the possible costs. You are guaranteed to save money by using your savings to pay your debt. You may or may not have a future emergency. If you do, you can use your credit card to pay for it. Still squeamish? Let's compromise. Keep $1,000 in your savings account. Send the rest to your credit card company and start to SAVE BIG.
To be clear, I am not talking about tapping into a 401k or IRA here. If you already have money in one of these retirement accounts, don't withdraw it because the penalties could well be worse than the credit card interest. If you are contributing to one of those while you have credit card debt, stop and pay the debt first. The one exception is if your employer makes a match, in which case you should contribute just the amount that is matched to get the free money.