Staying smart with credit card payments can beat interest rates
With a little thought and effort, it is possible to beat credit card companies in the game of interest rates.
While at Target the other day, my wife and I decided to look at TVs. We weren’t planning on getting one, however, one really stuck out at us.
The problem is that we just do not have the bank to pay for it outright at present.
As is the case with many other store cards, we would be able to get a discount (10 percent) if we signed up for a Target RED card. This gave me the idea to run the numbers and see if we would be able to come out ahead by having the interest paid be less than the amount of the discount – in this case $80.
In order to do this, I had to find out a couple of things. One of these things is how often interest is calculated, which for a credit card is going to be every day, and what the annual rate is, which for this card can run from 10 to 19.35 percent plus prime.
Since I’m trying to save money on interest, I want to limit the length of the outstanding balance to an arbitrary six months, as compared to paying the minimum. This allows me to calculate my payments using a simple time value of money calculator.
Assuming that I made payments to match the frequency in which interest is calculated, I would be paying $4.16 a day, for a total of $41.76 in interest paid at the end of the six months – and that’s assuming a 22.6 percent interest rate (19.35 percent + prime).
But even if I were to make weekly payments, the interest wouldn’t have as much time to compound as if I just waited for the end of each month to make a payment. Indeed, it turns out to be financially beneficial to get the card so I could get the discount if I stuck to my terms.
In comparison, that same $720 balance would take roughly 42 months to pay off, at a total of $327 in interest if I were to pay the minimum (the greater of 3 percent or $25). Moral of the story: use the ability to pay online to pay more frequently, and you too can beat the credit card companies at their game.
However, you aren’t relegated to beating the companies just by paying more often.
If you’re financially savvy enough, you can take advantage of the fact that most companies will eliminate interest if the entire balance is paid at the end of the month.
Instead of paying cash for an item, take the cash and invest it in an asset that is liquid enough so you can convert it back by the end of the month to cover the credit balance. If your investment strategy worked and you came out ahead, you essentially were able to margin trade with 100% leverage, and without interest.
