Pay Your Debt More Often

You probably get the same spam every day that we do - "reduce your debt now with our service!", "get out of debt fast", etc. Well, we at StudentPlatinum.com decided to get in on the action and really research how all this debt calculation works. It's not a secret - in fact, by law the calculations which determine your interest and payments cannot be a secret, it's just somewhat unpleasant math.

So, that said, here is the not-so-secret formula to reduce your debt faster - Pay your debt more often.

Probably not the closely guarded formula you were looking for, but it's true. It works on the principle of average daily balance, the billing method most credit cards use to compute interest. The faster you reduce your average daily balance (ADB), the more you'll save in interest. Here's an example. Say you have a starting balance of $1,000 on a credit card with 15% APR. If you do nothing all month and pay $100 at the end of the month, your finance charge will be computed as such:

(APR * days in billing cycle * ADB) / days in year = interest

(.15 * 31 * 1000) / 365 = $12.74 interest

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Now, suppose instead of paying $100 at the end of the month, you pay $25 per week, on the first day of that week.

• At the end of the first week, your ADB is $975.
• At the end of the second week, your ADB is $950.
• Week 3, $925.
• Week 4, $900.

You've paid the same amount of money, just more frequently. But it does affect your interest computation. Your average daily balance, instead of $1,000, is $937.50.

(.15 * 31 * 937.50) / 365 = $11.94 interest

A difference of 80 cents may not seem like much, but consider what it means for you. You paid exactly the same amount of money - at the end of the month, your wallet is $100 lighter. However, you are 80 cents richer because your ADB was lower. That's 80 cents that you didn't fling into the giant black hole known as interest payments.

Okay, so 80 cents per month will not knock out your debt as fast as you would like. Add this into your weekly budget: in addition to paying more frequently, pay more. If you can spare $5 per week (about 2 cups of Starbucks coffee), you can take even greater advantage of the average daily balance computation.

With that extra $5 per week, you've managed to reduce your balance AND save nearly $1 on interest, $1 that you would have otherwise never seen again.

The secret to debt reduction can be summarized as pay more, pay often. Take advantage of this unique mathematical weakness in the computation of your interest rate! With the advent of Internet Home Banking, most banks and credit unions allow you to automatically schedule payments - take advantage of that, set up your weekly payment, and start saving money!

Caveat: be sure your credit card uses the Average Daily Balance computation! Check your disclosure statement to verify. It is required by law to disclose how your interest is computed.

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