Shopping for Your Line of Credit – Part 4

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Shopping for Your Line of Credit – Part 4

Before I begin, first, a bit of housekeeping.

Two Templates Available for Your Use

As I have done in my last few posts, here are templates that I’ve designed to help you get started.

To help you identify the steps to get started and easily track your progress, I created a simple list of action items called Your Next Step Checklist.

To keep track of the features offered by financial institutions in your area, use this second template called Your Line of Credit Shopping Comparison

Why Would I Want to Carry a Credit Balance?

Today, you have extra cash sitting in your checking account and it’s doing nothing for you. Our goal is to keep your cash always working for you until you use it for its intended purpose. For a quick reorientation, take a look at
the picture of our line of credit.. If you have problems, copy and paste in your browser: http://sdrv.ms/18x1xVb. Look at the bottom of the page and click to the ‘2nd Month’. At the top of the page, you see that our beginning balance that we owe the bank $4,897. However, at the bottom of the page highlighted in orange, we only owe $.85 in interest!

How can this be?

Highlighted in blue is ($226). This is the average daily balance for the month. Consequently, with an interest rate of just 4.5 percent, we owe just $. 85. Pretty cool isn’t it? How did we pull this off?

When we were paid $5,025 at the beginning of the month, we made a loan payment totaling this same amount. Consequently, the $4,200 balance was paid off leaving a credit balance of 825. The bank is not going to pay us for letting our money sit in their line of credit. Instead, we’re going to use the $825 to minimize what we owe them. Remember, we already saved almost $18,000 in mortgage interest by using the bank’s money and making an additional mortgage payment of $5,200.

U.S. Banks Calculate Interest from the Average Daily Balance

If you had $825 sitting in a savings account earning one percent, the bank would pay you $.0226 cents a day. This line of credit charges an interest rate is 4.5 percent. They are hoping to charge for using their funds. Remember, U.S. financial institutions calculate interest by using the average daily balance for the month. A credit balances lowers the average daily balance for the month effectively keeping the amount you owe the bank to a minimum. Few people, banks included, notice this small nuance. Over time, this can really work to your advantage.

Here’s the Question to Ask!

Some banks will not allow you to make a payment greater than what you owe. Other banks will allow you to make a payment greater than you owe; however, they will immediately move the credit balance to your checking account. Ideally, you want to find a financial institution that does nothing with credit balances for at least 30 days.

In our example, we needed only 14 days. On the 15th day, our regular mortgage payment was due.

When I’ve asked these questions, I’ve never been asked why this feature is important. Again, few banking staff understands this concept. They’ll simply provide you the answers to your questions.

In my next post, we’ll discuss the importance of knowing your billing cycle date.

Ready to start your journey towards financial freedom? Get started today!

I’d love to hear from you. Please send your questions, topics or suggestions to dennis@cashmapconsulting.com. Thanks!

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