Does paying twice a month reduce interest on a credit card?

How Bi-Weekly Credit Card Payments Impact Interest Charges

Many credit cardholders are aware of the importance of making on-time payments to avoid late fees and damage to their credit scores. However, fewer people fully understand the impact of the timing of their payments on their overall interest charges. By paying your credit card balance twice a month, rather than simply once a month, you can significantly reduce the amount of interest you pay over time.

Understanding Average Daily Balance

To calculate your interest charges, credit card companies use something called your average daily balance. This represents the average amount of debt you carry on your card over a given period, typically from the end of your last billing cycle to the end of the current cycle.

When you make a payment, your average daily balance is reduced. Therefore, by making two payments per month, instead of one, you effectively lower your average daily balance for a longer period. This results in lower interest charges because the interest is calculated based on this average balance, not just the ending balance on your statement.

Example Calculation

To illustrate, let’s say you have a credit card with a balance of $1,000 and an interest rate of 18%. If you pay off the balance in full at the end of the month, your average daily balance will be $1,000. Your interest charges would be calculated as follows:

Interest = Average Daily Balance * Interest Rate * Number of Days
Interest = $1,000 * 0.18 * 30
Interest = $54

However, if you pay half of the balance ($500) on the 15th of the month, your average daily balance would be reduced to $750 for half the month and $500 for the other half. This would result in lower interest charges:

Interest = (Average Daily Balance for First 15 Days * Interest Rate * 15) + (Average Daily Balance for Last 15 Days * Interest Rate * 15)
Interest = ($750 * 0.18 * 15) + ($500 * 0.18 * 15)
Interest = $27

As you can see, by paying twice a month, you save $27 in interest charges. Over time, these savings can accumulate and significantly reduce your total interest payments.

Conclusion

Paying your credit card balance twice a month is a simple but effective strategy for lowering your interest charges. By reducing your average daily balance, you can minimize the amount of interest you pay on your outstanding debt. This practice can help you pay off your balance faster and save money in the long run.