Lower credit card debt with biweekly payments

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By By Jean Chatzky

Tired of paying so much in finance charges to your credit card company each month? Here's a solution you may not have considered: Make biweekly payments.

This is how it works: If you're the sort of customer that carries a balance on your credit card (and these days, most customers do), card issuers typically charge you interest on a daily — that's right, daily — basis. Lowering your balance sooner rather than later, therefore, means that over time you pay less interest. Submitting half payments every two weeks rather than a bigger payment once a month will do the trick.

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“The sooner your payment gets there, the sooner your average daily balance goes down and the less interest you will pay,” says credit card expert Gerri Detweiler, co-author of “Slash Your Debt: Save Money and Secure Your Future.”

There's another advantage to going biweekly as well. If you pay half of your monthly bill every 14 days, by the end of the year you will have made 26 payments — the equivalent of 13 monthly payments or one more than the 12 you would have made by sticking to the traditional bill schedule. (This is the same reason that making biweekly mortgage payments cuts a 30-year mortgage down to a 23-year mortgage.)

Before you start mailing in additional checks, however, call your credit card company to make sure it allows you to submit your minimum payment in two separate payments. Catherine Williams, vice president of financial literacy at Consumer Credit Counseling of Chicago, says that not all issuers will credit multiple payments to your monthly minimum. If you're going to make the effort, you want to be sure.

Once you get the go-ahead, here's what you need to know to plow ahead:

  • No sign-up required. Unlike biweekly mortgages, you do not have to alert your credit card company that you're planning to do this, says Williams. There's no sign-up required and you will not receive a statement every two weeks. What that means is that you'll have to make some payments without a payment coupon. That is why the best way to pay the bill is online. This will prevent any confusion about which account gets credit for the check. Also, you can monitor your account online to make sure your issuer credits the payments. The law generally requires credit card companies to post a payment the day the issuer receives it.

    Note: If you avoid banking online because you worry someone will steal your identity, remember that research suggests you face a higher risk of identity theft offline through a paper trail than you do online. If you still wish to make payments through the mail, and you do not have a stub to enclose, Detweiler recommends writing your account number on the check and enclosing a short note with the account number as well. (Although I usually do not advocate writing your account number on your checks, credit card companies recommend it in this instance to make sure your payment is credited to the correct account.)
  • Decide how much to pay. The biweekly method is most powerful when you pay every 14 days, and you continue to pay the same amount. So as you pay down your balance, do not begin making smaller payments. Pay half of today's minimum balance with each check until you completely pay off the card. For example, according to Detweiler, if you charged $5,000 on a card with a 17 percent interest rate, that makes your monthly payment at least $100. So if you pay $50 every two weeks, you will cut your interest by $8,149 and be debt free in six years and 14 weeks (that's 34 years faster than if you had simply paid the minimum monthly payment).
  • Figure out if it's right for you. This method proves most effective with large balances on high interest rate cards. If you carry a smaller balance, biweekly payments won't make that much of a difference. You must also be committed to cutting your spending (or at least your charging). “If you are serious about getting out of debt and trying to save some money by using biweekly payments, hopefully you are not charging anymore,” advises Detweiler. rightfalsefalse0truefalsefalse10

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  • Get organized. The method may prove difficult for the unorganized. One of the trickiest parts is sticking to the 14-day schedule. If you fall behind in payments, you will face late fees. Set up an electronic transfer every other Monday (especially if you get paid every other Friday) so that the bill automatically gets paid.

    Finally, remember as you try to get out of debt, this is but one of the tricks up your sleeve.

    Continue to pay as much as you possibly can toward your highest interest rate card. And track your spending to cut out frivolous costs you weren't even aware you were incurring.
  • Have a back-up plan. And if you decide — at the end of the day — that you don't possess the organizational skills required to make biweekly payments, pay your monthly bill as soon as it arrives. That will also save you money. The earlier your payment arrives the sooner your daily balance goes down, and the less interest you will incur over time.

Jean Chatzky is an editor-at-large at Money magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today Show" and is also a columnist for Life magazine. She is the author of four books, including "Pay It Down! From Debt to Wealth on $10 a Day" (Portfolio, 2004). To find out more, visit her Web site, www.jeanchatzky.com.