The Foolishness of 'Velocity Banking'

You may be surprised, but I have dozens, if not hundreds of people who tell me each year that the best way to pay off my debt is to use my credit card. It's called "Velocity Banking." It's been called other things, too, like chunking, HELOC hacking, etc. It's all just plain dumb...if you understand math.

The Premise:

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Velocity banking tells you that you can "Give it back to the bank" by "using their games against them" or something similar. The way it works is you get a line of credit (LOC) and you borrow half of your credit line, putting the "chunk" payment down on your debt. Now, you put your paycheck directly into your LOC as a direct deposit. From here on until your debts are paid in full, you'll use your LOC to pay your bills, buy your groceries, etc. The plan should have your LOC paid off in 6 months or less, when you'll borrow against it again to put down another chunk onto the bill you're trying to pay off. Most say to use it against your house.

The Sell:

Velocity Banking evangelists preach that you will pay twice as much interest on your house as your principle balance if you just pay the minimum balance for 30 years. If you use VB (velocity banking) to pay it down, you'll have it paid off in 5-7 years, saving hundreds of thousands in interest. They then point at the interest you would have paid on the mortgage over 30 years vs the interest paid on the mortgage over 5-7 years using their method, fully expecting you to think it's an apples to oranges comparison. https://unsplash.com/photos/O6DUoIl6NWA

The Truth:

If you use a LOC to pay chunks down on your mortgage, you are now being charged interest on that chunk that is at a higher rate than your mortgage in almost all cases. As long as that interest rate is higher on LOC than the mortgage, you'll pay more interest than making the same extra payment on the mortgage to pay down the principle balance monthly. As a matter of fact, if you are able to clear $1000 per month toward paying a $6000 LOC charge, you could simply put that same $1000 toward the mortgage with everything else in your life equal...assuming your bills would be the same, groceries would be the same, etc. The only difference is how much is applied toward the LOC at the end of each month because it's going into it rather than a bank account...thus every penny is going toward the debt.

I did the math using a YouTuber's numbers (an evangelist for VB) and found I could pay off my house 6 months faster by applying the additional payment toward the mortgage instead of the LOC. I also paid thousands less in interest. That's apples to apples...what you would have paid in interest paying off you loan intently to pay it off quickly vs the interest you would pay a LOC to intently pay off the loan.

When they tell you that their method saves you tons in interest, it's true! It's just not as good as paying it straight to your mortgage. I've seen some people claim that even if you were to pay 20% on the LOC as interest and 6% on a mortgage (old number if you ask me), you'd still pay less in interest. I quickly point out that every moment your money is being charged 20%, it's a moment you could have been charged only 3% for the same portion in the mortgage. They just don't get it.

I hope you do...

They say that "Amortized interest" is terrible because most of your payment is interest...it's true that it is, because "amortization" is simply the ability to take what you owe and break it up over a length of time so that the entire debt is paid for after the time is up. To do this, you purposely plan to pay a smaller principle payment in the first payments, thus your principle balance remains high...the same thing would happen to credit card payments if you don't pay them off each month...the principle balance gets charged over and over again...

Have any questions? Ask away! I finally have enough Resource Credits that I think I can respond to every comment 😁 https://unsplash.com/photos/0b5g9_pnMqc

The term "Velocity Banking" is true...it's just at a slower velocity than just paying your payment straight to the lender...

unless you can refinance to a lower interest rate...**