Monday, 29 October 2012

Credit Card Maths

In a previous post about interest rates, I mentioned how long it can take to pay off your credit card.

The example I gave was from a major credit card company that charge a rate of 19.9% APR, which is pretty average for these sort of products, with an outstanding balance of £3,000 which is not uncommon.

I also mentioned I had knocked up a spreadsheet to help work out all of this for myself, and that I would shortly be sharing that.

Well here it is:
Credit Card Interest Rate Calculator (if the link doesn't work, copy and paste this: You need to put in the blue figures and the rest will self calculate

Have a play around with the figures and see how paying just a little bit extra each month will compound your savings and get you out of your debt that much faster. Obviously, readers outside the UK, just imagine the £ sign as the relevant symbol ($,€,?) for your own currency instead.

While we're talking about it, here's a tip for cutting down the interest you pay on your credit card while you clear your balance. If your balance is low enough, you could eliminate interest altogether! What I'm talking about, is taking your wages and paying a large portion of it onto your card each month.

Think about it. If you use your debit card to pay for stuff like your shopping, or filling up your car, you could just as easily put this money on your credit card, and use that instead. If the balance is small enough, you could even clear that card. Here's an example to explain what I mean:

Imagine you have a credit card with a £500 debit balance. After paying the mortgage and the rest of the bills, you have £800 left in your current (checking) account, so you pay £500 onto your credit card. Then you use that card for your everyday spending, until your debit balance is back up to £400, then switch back to using your current account for the rest of the month.

The next time you get paid, you pay off the debit balance again, but this time it's only £400. You use the card through the month again until the balance reaches £300. In this way, you are effectively paying £100 off your credit card balance every month, but not being charged interest on it!

NB: the interest rolls over from the previous month, so the first month you may still be charged interest.

If your credit card balance is somewhat bigger, it still makes sense to pay what you can on it and use it in the same way, because although you will still be paying interest, your average balance over the month will be less, resulting in you paying less interest.

Care should also be taken when making payment on your card because although the money goes from your bank straight away, it often takes a few working days for the funds to clear onto the card, and you don't want to be left without any funds in the meantime. Think about your cashflow.

You should also remember, if you need cash, take it out of your current account, not off your credit card, as credit cards charge fees for cash withdrawals and you can't get round that.

I hope you find this post helpful, let me know what you think in the comments below.

A quick note about sharing.

I have published the credit card calculator for anyone to freely download and use for their own personal benefit. Once it's on your own PC, you can edit it and do with it what you will. Should you wish to share this with others, then please, please, please - share the link to this post - NOT the document itself, or the download link. 
I published it here so that people would come and actually read my blog - Thanks.

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