ADVICE: Paying off the monthly balance

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Best way to pay off monthly balance

Bear in mind that many credit cards will not charge you any interest providing you pay the balance off in full by the settlement date shown on the statement. If you have two or three different cards, and you have enough to pay a reasonable amount off each one, or to pay off just one in full, then you will be better off to pay off whichever card you can meet 100 per cent of the payment on. The reason for this is that even if you're just a few pounds short of paying off the full balance, you'll be charged interest on all outstanding balances from the date charge occurred.

This is illustrated in the example below:

• You have three credit cards, each with a £1000 limit, and you owe £500 on each one. All three charge interest at 1% per month, and offer a settlement time of 3 weeks from issuance of the monthly bill. You have £900 available to pay.
• If you simply divided your £900 into three payments of £300, you would then be left with £200 outstanding on each bill. However, as the balance is not being paid off in full, you will pay interest on the £200 outstanding balance, and the period between when you make the purchases and when a payment was received for the £300 you are paying off.
• 1% interest on the remaining balance = £600 x 1% + 1% interest on the total balance before you made payment = £1500 x 1%. Total: £6 + £15 = £21
• If, instead, you paid off one card in full, you will then have £400 left to split between the other two, leaving £300 on each card.
• You would pay zero interest on the card you pay off in full, and 1% x £600 interest on the other cards = £6 + 1% x £1000 = £16.

 

Therefore you are saving yourself £5 per month by paying off one card in full. This adds up to potentially £60 per year, if you were to do this every month.

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