When making ‘extra’ debt payments, be sure that you understand the ‘policies and procedures’ that your creditors have implemented. Call your creditors and ask –
1. If I send in a payment amount that is ‘above’ my ‘minimum payment’ – how will that payment be handled?
This is a very important question. Certain creditors will ‘hold’ any amount that is above the minimum payment – and apply it as a ‘prepayment’ of the next month’s minimum payment. This is especially common with automobile companies and some mortgage companies. Remember, we want our ‘extra payments’ to go towards ‘principal’. We do not want to ‘prepay’ – we want to ‘pay off’.
2. If I want to send in more than my minimum, should I send more than one check?
This question relates to question 1. I always liked to make multiple payments per month to my creditors. On each and every ‘extra payment’ I would make a notation – ‘Please cash immediately and apply to principal’. Again, we do not want our creditors ‘holding’ extra payments and waiting to cash them. Also, I used FREE ONLINE BILL PAY to initiate extra payments. I never gave a creditor access to my checking account. In other words, all ‘extra payments’ were initiated by me, and not my creditors.
3. Is there a prepayment penalty associated with my loan?
If so, you need to get out your loan documents – prepayment penalties are usually associated with mortgages – and do you very best to understand every detail about the ‘penalty’. I have never had a ‘prepayment penalty’ associated with a loan, so I have no personal experience with them. But, if you have one, you need to know about it!
4. Is there a limit to the number of ‘extra payments’ I can send?
Some credit card companies limit the number of transactions that can be INITIATED from their websites. In other words, if you are going to your credit card company’s website and ‘pulling’ money from your checking account, these types of transactions may have a ‘per month’ limit. To avoid these limits – login to your online banking account and ‘send’ money to your credit card company. In other words, as in question 2, YOU will initiate the transaction on ‘your side’ and you will not be using the credit card company’s ‘payment service’.
5. How is my interest calculated?
Interest calculation is a ‘complex topic’. I’m working on a post about the subject – it should be ready for release in a few days. But, suffice to say, you need to have a basic understanding about how your creditors are calculating your interest. For most loans, the SOONER you make a payment, the LOWER your calculated interest will be. But, to be sure, contact your creditor and ask!
Now, I know what some of you are thinking. Why would my creditor be willing to answer my questions about debt reduction? Well, companies are bound by law to be honest with their customers. If you don’t feel like you are being told ‘the whole truth’, request a conversation with a manager or supervisor. The goal is to gather as much information as you can. Don’t be intimidated. Ask questions, listen, take notes, and be polite. If you don’t FULLY understand an answer, rephrase the question. Again, our goal is to get out of debt – and part of that process is understanding how your creditors handle extra payments.
If you have additional questions that you think should be asked, leave a comment and let us hear from you.