Understanding Interest: Why Velocity Banking Works
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, and how velocity banking saves you money by minimizing the time your money sits idle.
How Credit Card Interest Really Works
Most people don't realize credit card interest is calculated daily, not monthly. This seemingly small detail makes a massive difference in how much you pay.
Daily Interest Calculation:
Step 1: Annual rate ÷ 365 = Daily interest rate
Example: 18% APR ÷ 365 = 0.0493% per day
Step 2: Balance × Daily rate = Daily interest charge
Example: $10,000 × 0.0493% = $4.93 per day
Step 3: Daily interest × Days in month = Monthly interest
Example: $4.93 × 30 days = $147.90/month
The Shocking Truth:
On a $10,000 balance at 18% APR, you pay approximately $150 in interest every month just for the privilege of carrying that balance.
That's $1,800 per year thrown away before you reduce the principal by even one dollar!
Average Daily Balance: The Key Concept
Credit cards use your average daily balance to calculate interest. This is where velocity banking creates massive savings.
Traditional Method Example:
Balance at start of month: $10,000
Balance at end of month: $9,800 (after $200 payment)
Average daily balance: ~$9,900
Interest charged: $147.90 (based on average daily balance)
Velocity Banking Method Example:
Use HELOC to pay balance: $10,000 → $0 (Day 1)
HELOC balance at start: $10,000
Deposit $5,000 income: Balance drops to $5,000 (Day 15)
Pay $4,500 expenses: Balance rises to $9,500 (over month)
Average daily balance: ~$7,500 (much lower!)
Interest charged at 7%: $43.75 (vs. $147.90)
SAVINGS: $104.15 this month alone!
Real-World Comparison: $20,000 Debt
Let's compare traditional debt payoff vs. velocity banking with real numbers:
Traditional Method
Velocity Banking
Total Savings
$16,442
Plus 80 months (6.7 years) of your life back!
Why Velocity Banking Works: The Math
Velocity banking exploits three mathematical principles:
1Lower Interest Rate
HELOC rates (5-8%) are significantly lower than credit card rates (15-25%), reducing daily interest charges by 60-75%.
2Reduced Average Daily Balance
Depositing income immediately reduces your balance for days or weeks, lowering the average daily balance that interest is calculated on.
3Maximized Principal Reduction
With lower interest charges, more of your monthly cash flow goes toward reducing principal instead of paying interest.
The Power of Time: Why Every Day Matters
Here's a powerful example showing why timing matters with interest:
Scenario: $5,000 paycheck
Traditional: Paycheck sits in checking 15 days
- • $20,000 debt at 18% APR = $9.86/day interest
- • 15 days × $9.86 = $147.90 wasted
- • Checking account earns 0.01% = $0.02
- Net loss: $147.88
Velocity Banking: Paycheck deposited to HELOC immediately
- • $20,000 HELOC drops to $15,000 instantly
- • New balance at 7% APR = $2.88/day interest (for 15 days)
- • 15 days × $2.88 = $43.20 interest
- Savings: $104.70 in just 15 days!
By immediately applying your income against debt, you save $104.70 every two weeks.
That's $2,722 per year in interest savings alone!
The Simple Formula
Interest Savings Formula
= Your Savings
Example:
(18% - 7%) × $20,000 × 1 year
= 11% × $20,000
= $2,200 saved in year 1
The Bottom Line
Velocity banking works because of simple mathematical principles:
- • Lower rates reduce daily interest charges
- • Immediate deposits minimize average daily balance
- • More cash flow goes to principal instead of interest
- • Shorter payoff time compounds all these benefits
The math doesn't lie: every day your money sits idle in a checking account instead of reducing debt, you're losing money. Velocity banking puts your money to work immediately, maximizing savings and accelerating your path to debt freedom.
Calculate Your Interest Savings
See exactly how much you'll save with velocity banking
Run the Numbers