How Dividing Your Monthly Credit Card Payment Speeds Up Your Payoff Date

You’re not alone if you’re running a balance on your credit cards. Collectively, Americans are running up our balances in record numbers. Also, 36% of us have more credit card debt than emergency savings.

If the questions Team Clark has been getting are any indication, many of you are looking for the best ways to pay off your high-interest credit card debt.

One such question raised an interesting topic.

Should I Divide My Credit Card Payment Into Multiple, Smaller Payments?

Is it better to pay off my credit card with a single monthly payment or multiple smaller payments? And should I use my extra cash to pay my debt or start investing?

That’s what a Clark Howard listener recently asked.

Asked Katie in Connecticut: “Do you recommend paying down credit card debt ($5,100) with extra money ($1,000) or beginning an investment habit by investing that in mutual funds?

“[And] does making three smaller payments ($100 each) in a billing period against credit card debt help one’s credit score more than one payment ($300)?”

Let’s start with the second question first. You receive a monthly credit card statement. If you pay off the balance in full every month, you may not give a second thought to how the interest works.

But if you’re running a credit card balance from month to month, know you’re accruing interest daily. Your credit card issuer isn’t slapping you with interest once at the end of the billing cycle even if it seems that way.

“You’re going to be able to pay that debt off quicker paying it in three $100 payments throughout a month rather than paying all $300 at one time late in that cycle,” Clark says.

“Because that $100, once you’ve paid it, there’s no more daily interest on that $100. That’s why people who pay their credit card bills every two weeks and just keep paying enough to cover the minimum will end up out of debt in a fraction of the time [vs.] people who make one payment at the end of the month before the due date.”

That’s valuable information. And although making multiple payments won’t affect your credit score, reducing your overall credit utilization will. And making multiple payments over time will do that faster, improving your credit score indirectly.

Should I Pay Off Credit Card Debt or Invest?

Let’s return to Katie’s other question. She has $1,000 in extra cash and $5,100 in credit card debt. Should she put all of her $1,000 toward her debt or invest some or all of it instead?

Even if you’re investing your money 100% in equities (stocks), such as a total stock market index fund or an S&P 500 fund, you’re not going to earn 20%+ in the long term.

Right now, the average credit card interest rate tops 20%. And in some cases, credit cards charge rates are much higher than that.

So the math gives a clear answer: in a vacuum, it’s better for your bottom line to pay off your high-interest credit card debt with every penny you have available.

“You’re not going to earn 20% in investments but at the same time, it’s great to start a habit,” Clark says. “So I would say you open a Roth IRA if you don’t have a Roth rather than a regular investment account, Katie. And you do 25% of the money in the Roth so you’re building that habit. And the other 75% goes toward the credit card debt.

“Because the credit card debt impact is so great. But also building that habit of doing that Roth IRA consistently every single month and then once you pay off the credit card debt having a lot more money to put toward the Roth will pay off for you so well over time.”

Clark often focuses on behavioral economics. “Know thyself” is one of his frequent idioms. If using some of the $1,000 — and even some of the $300 per month — to fund a Roth IRA builds a long-term habit, it’s worth doing that simultaneously.

Even if the math says otherwise, you can consider investing a small portion of your dollars.

Final Thoughts

Splitting your credit card payment into multiple pieces, some of which you submit sooner, will help you get rid of your credit card debt faster.

Paying off your credit card makes more math sense than investing. But if you have extra money, consider investing 25% of it, Clark says. That’s especially true if you’re not already auto-investing toward retirement every month.