Another maths question

There was one recently about savings interest. Now I have one. Mine is about credit card interest.

Lets say you have a credit card debt of about £5,500, with an interest rate of around 20% APR, and you're paying off the minimum payment (thus taking a lifetime) of 2% of the balance each month.

Now lets say you suddenly have this idea, that every pay day, having calculated how much you'd normally spend in a month on your debit card, you pay off that amount onto your credit card, and then pay for everything on the credit card instead of the debit card. The idea being that because the payments are spread over the month, on average you'll owe less.

So, based on the rough figures above, lets say that in addition to the minimum payment, I paid an additional £600 per month off my credit card, but over the course of that month also spent exactly all of that £600 but spread evenly over the month so that on average my debt was £300 less.

So based on that, who is clever enough to work out how much I'd save each month on interest payments?

 

No, you've lost me already

 

cant help 1, i am rubbish at maths 2, i wont have a credit card (far too much temptation)

 

The credit card provider

£5000 o/draft is a little uncomfortable (the bank may withdraw it and ask for immediate payment if they wished) so would taking (for example) a £1000 o/draft be an option? Pay a grand off one month and continue with the minimum payments then until the o/draft is settled and repeat the process.
Or a secured bank loan over the longest possible period?

 

At the very least details of average monthly expenditure and the date which the credit card bills fall due would be required to have a stab at it.

But basically if you deduct what you can't pay with a credit card (such as mortgage) together with what's required to pay any bills between paying the bill and that amount being credited to your cc account - 3 to 5 days?) from net income (including child benefit and tax credits) then you reduce the amount you pay interest on every month.

Borrowing to the limit, paying the minimum each month, using the small amount of newly available credit to borrow to the limit again must be the biggest waste of money there is, apart from having several credit cards and getting cash advances from card A to pay min on card B, borrowing cash from B to pay min on C, etc.

Changing to a lower interest card would help, as would a balance transfer with 6 or 12 months with zero interest.

 

The saving on credit card interest by paying as much off as possible each month to avoid interest, then using the cc as much as possible for that month's purchases should be something like this (using notional amounts that require adjustment):




If relying on that reduction alone to reduce the debt it would take over 15 years to pay off £5,500, and that's not allowing for future interest rate rises.

 

Clueless - I think the calculations are all done by computer on a daily basis using a daily rate of interest, that adds up, on a compound basis, to 20% per year. So it all depends on which day the charges and credit occur. If you don't pay the balance off in full, the interest is charged from the day the purchase was made - ie you don't get a month's free credit. You only get a month's credit if you pay the balance off completely.

Its true that if you spread your card expenditure evenly over the month the average debt would be half that of a full month. However if you paid off £600 in the middle of the month you average credit would only be half that of a full month - so I suspect you would gain nothing. You would only gain if your payday occurred in the first half of the month. However making any payment during the month would be better than leaving it to the end of the month, though you would still have to pay off the 2% at the end of the month as well.

My reaction is the same as others 1) replace the balance with a loan at a lower rate of interest - 20% is a ridiculously expensive rate. and 2) pay off the balance as quickly as possible - you are currently paying £76 a month in interest on a debt of £5000. But more than that I think that any debt these days leaves you dangerously exposed to a change in circumstances - ie illness, accident at work, loss of job etc.

 

Shiney - you may be right. The values are all calculated by computer and it depends on how the computer program is written. People generally are not able to check these calculations and are not able to tell if they have been overcharged.

JWK - two points to remember with 0% balance transfers is that 1) they are not 0%, they have a transfer fee of about 3% - so I would call a claim of 0% a blatent lie. and 2) if you transfer a balance - no further interest is charged on the balance for the period, but if you make extra purchases on that card and then pay these off - your payment is taken off the balance and you pay the 20% rate on all the purchases you make. So really you want a 0% transfer and then never make any extra purchases on that card - use another card for extra purchases.

But a 0% (ie 3%) card transfer could save quite a bit of interest.

 

Excellent John - Tesco looks good value. But don't put any normal purchases on it.