Understanding Interest: Why Velocity Banking Works
The math behind velocity banking explained in simple terms. See exactly why this strategy saves so much money.
The secret to velocity banking's effectiveness isn't magic—it's math. Understanding how interest works reveals why keeping money in debt longer costs you thousands.
How Credit Card Interest Really Works
Most people don't realize credit card interest is calculated daily, not monthly.
Daily Interest Calculation:
- Annual rate ÷ 365 = Daily rate
Example: 18% APR ÷ 365 = 0.0493% per day - Balance × Daily rate = Daily interest
Example: $10,000 × 0.0493% = $4.93 per day - Daily interest × 30 = Monthly interest
Example: $4.93 × 30 = $147.90/month
On a $10,000 balance at 18% APR, you pay approximately $150 in interest every month just for carrying that balance!
Simple Interest vs Compound Interest
Compound Interest (Credit Cards, Mortgages):
Interest is charged on interest. If you don't pay your monthly interest, next month's interest is calculated on a larger balance.
Simple Interest (HELOCs):
Interest is only charged on the principal balance. This is why HELOCs are so effective for velocity banking—every dollar you deposit immediately reduces the balance you're charged interest on.
The Velocity Banking Advantage
When you deposit your $6,000 paycheck into your HELOC on day 1:
- Your HELOC balance drops by $6,000 immediately
- Interest is calculated on the lower balance for the entire month
- As you spend throughout the month, the balance rises slowly
- Your average daily balance is much lower than $6,000
Real Example
$10,000 HELOC balance at 8%, $6,000 income, $4,500 expenses:
- Traditional approach: Pay interest on $10,000 all month = $66.67
- Velocity banking: Average balance ~$6,000 = ~$40 interest
- Monthly savings: ~$27
This doesn't sound like much, but multiply by 12 months and across your entire debt picture—the savings add up to thousands.
Why Mortgage Interest Front-Loading Matters
On a 30-year mortgage, early payments are almost all interest. Example: $350,000 at 7%
- First payment: $1,940 interest, $389 principal
- After 5 years: Only paid off 6% of principal
A $10,000 principal payment in year 1 eliminates interest on that $10,000 for the remaining 29 years—saving potentially $35,000+ over the life of the loan.
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VelocityBanking.io Team
Verified AuthorPersonal Finance Experts
Our team combines expertise in personal finance, mortgage lending, and debt elimination strategies. We've helped thousands of families create personalized debt payoff plans using velocity banking principles.
- ✓Analyzed 10,000+ debt payoff scenarios
- ✓Published 50+ educational articles on debt elimination
- ✓Expertise in HELOC, PLOC, and mortgage acceleration strategies