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Every once in awhile, Mint gets email with questions on personal finance; and every once in awhile, we put on our thinking cap and (try to) write a thoughtful response to these emails. Here’s one such email from one of our readers, and the corresponding opinions from this very minty blog. While you read this post, think about how Mint’s debt management tools may help you.

Dear Mint,

I have a credit card on which I carry a balance of about $9,000. All of my monthly bills are charged to this card, which come to $800. The interest charge is about $120, so that equals a minimum payment (in my way of thinking to keep my balance from going up) of $920. I pay more whenever possible, but it’s usually not much.

Two things:

1 – I know that using my credit card to automate my bill payments while I’m carrying a balance is not the smartest thing. The convenience is really important to me, though. I’d like to find out what the cost of that convenience is. Which leads to number 2.

2 – If I was to break down the $920 into four payments, one about each week, would that save me any interest?

The answer would seem to be yes, since my credit card company uses the daily method to calculate interest and the twice-a-month method to compound it. I set aside time for my finances once a week, so it would be no particular extra work to set this up. However, I would be interested to see a post about this or better yet, an online calculator, so I can enter my balance, interest rate, payment, etc. to discover how much I would save in interest, and maybe an add-in that would show me how I would save if I made no charges on the card.

Mint’s two cents:

1. Putting additional charges on a card already with a balance will definitely cost in terms of interest, but as for how much, it really depends on when the charges are place during the credit card’s billing cycle.

Having said that, let’s take it from a simple perspective. Whenever you have a balance, the grace period (the time where finance charges aren’t incurred on a credit card) won’t be available when you make a new purchase. If you have no balance, the grace period is generally 20-25 days before interest starts accumulating on your purchases.

Thus, $800 per month of charges at 16% interest amounts to about $10.67 per month in finance charges, which may not seem like much, but will be more than $130 per year. That’s an extra $130 that can put towards a balance!

2. Breaking the payments down will definitely reduce interest somewhat, but unless we know exactly when the charges are being made, it is difficult to come up with a number. But as as mentioned by the reader, breaking down payments should indeed reduce interest by a good amount, base on that particular card’s calculation and compounding method.

We couldn’t find a calculator that does exactly what the reader wanted, but check out this minimum payment calculator, which shows a good graphical breakdown of how paying minimum only can end up costing a staggering amount. At Mint, we have some debt management tools available as well.

A quick note: Paying the minimum only on the credit card above will really be difficult, as it will take more than a life time to pay off the card! In fact, you won’t reach $1,000 in balance until about a hundred years later if you only pay the minimum per month, as so little of it goes towards the principal amount.

Certainly, most people would put a large payment towards the card whenever possible, so the calculator’s scenario isn’t exactly realistic — but it still paints a gloomy picture if you really do only pay the minimum!

3 – Okay I guess its three things. If I didn’t use my card to automate my monthly payments, I would have to write out all those pesky checks and have to choose (and buy) check designs and buy stamps and actually go to the post office and make sure that there is enough time between the mailing date and the due date so that I don’t get a late charge. Is there an alternative?

Thanks!

Mint’s extra penny:

3. There is definitely an alternative, and as everyone can tell from the numbers above, saving additional interest charge on this 16% APR credit card will really help!

Thus, it may be worthwhile to consider using a check/debit card to make the bill payments instead. They have the same convenience factors as a credit card, and you wouldn’t have to worry about mailing the check or due dates.

Most checking accounts should have a check/debit card available to them, with a VISA or MasterCard logo on them. They enable you to make charges to your checking account the same way you make charges to your credit card. You can also schedule automatic bill payments will these check/debit cards as you would a credit card.

If you don’t have a check/debit card, you should request your bank for one. If your particular checking account doesn’t have it as a feature (which is quite rare), there will be many other financial institutions that will be more than happy to offer you a fee-free checking along with a check/debit card.

Some Food for Thought:

1. If you’re carrying a balance on your credit card, consider switching to other types of payment for your purchases, as charging additional purchase on the card will make it more difficult to pay off the balance.
2. Check/debit cards are a great alternative to the convenience enjoyed by credit card purchase. You may find that your home budget will just fall into place.
3. Paying only the minimum on a high interest rate credit card can really cost you! If you’re carrying a balance on your card, you should check out the minimum payment calculator and see how much money you can save just by adding an extra percentage or two into your monthly payment!

Thanks to anonymous reader #1350 for the great question and for letting us repost the question!

Further Reading on Budgeting Tools

Money saving tips, tracking, and tools
Household Budget Software
Create a Personal Budget Online
Expense Tracking and Planner

I was fresh out of college, and the job market in my city was shite. Needing a place to live, I needed a job, so I decided to start a consulting business and expand what I’d done in college, for beer money, into a living.

All was well for the first few months, mostly. I ran up my credit cards a bit, but my cash flow was good and I was staying ahead of expenses. Still, I might have been wise to look into some debt management tools.

Fast forward two years. I’d had to hire employees (I was advised to use other consultants that were cheaper, but I thought employees would be cheaper and easier to manage because I could squeeze them for extra work on the products that I’d intended to put out to mass market… Ha!), as well as acquire office space, telecom, and so forth. My company’s cash flow turned upside-down, though, when a key client decided to pull all of their information technology work in-house. Scrambling, I decided to rob the payroll tax withholding account to make ends meet; surely the new clients I’d just picked up would help make up the difference! I’ve survived longer than most entrepreneurs do! See? I’m an optimist! Look at this smile!

In January of 2006, I reviewed the books — and immediately laid off my last remaining employee, because there was no way I was going to make it. I hadn’t paid payroll taxes for the last quarter and a half. I’d managed to use the last of the cash that the company had to either finish or buy my way out of our contracts, I traded quick work or office equipment to get out of telecom and office lease agreements, I traded the shirt off my back to get my way out of the server colocation agreement, I sold the remainder of the equipment, and I fled town to live with my girlfriend halfway across the country.

This, of course, left me with close to $20,000 in debt to the federal and state governments, with $10,000 in credit card debt, and two payments behind on my car. So what did I do? Turn myself in and set up payment plans, and start working my ass off mowing lawns for the extra income? Nope. I stuck my head in the sand, the paperwork in the box, and forgot about it … for a year. In the past year, that $20,000 in debt has grown to almost $40,000 in debt due to penalties. And because it’s “trust” debt, it can’t be forgiven in a bankruptcy. (At least the credit cards are down to $3,000 and I still own my car.)

Now that it’s been a year and I have this pile of paperwork from the IRS in front of me, I’m so stressed out that I’m on two antidepressants and an anti-anxiety drug, and I’m paying a psychologist a lot of money to keep me from pulling a post-office at work… because, damnit, I need to keep my job if I’m going to ever pay this off. Not only that, but I need some debt management tools. On top of those, I’m doing a ton of consulting work (Minor Pimp: I write really cool PHP/Symfony Apps for a living) to try to pay this off before hell freezes over.

If I’ve learned one thing: The world won’t fall on you if you take responsibility for something and provide a plan to work your way out of it. No, the world falling on you is a more subtle and slow process, and it only happens when you’ve got your head stuck in the sand because you’re afraid it’s going to fall on you. It’s a self-perpetuating (and very deadly) cycle.

Train Wreck Tuesdays are a weekly post of horrible financial mistakes. They are posted anonymously. Submit your story; if you’re selected, you get a free personal finance book. The best comment gets the same prize!

Further Reading

• Free Online Financial Calculator
• Household Budget Software
• Personal Budget Management