The best time to pay your credit card bill is before its monthly due date, but did you know that timing your payment earlier can impact your credit scores and lessen interest? Let’s explore the nuances of the credit card billing cycle to know when to pay your credit card bill and make better financial decisions.
When you’re close to a 30% credit utilization rate
Knowing when to pay your credit card can help you increase your credit score. One of the best times to achieve that is to pay your bill when you’re getting close to utilizing 30% of your available credit.
Your credit utilization rate (the ratio of your credit card balance to your credit limit) significantly impacts your credit score. It constitutes 30% of your FICO credit score, making it essential to keep an eye on. To calculate your utilization rate, divide your total credit balance by your credit limit and then express it as a percentage. For example, if you have a $5,000 balance on a credit card with a $10,000 limit, the credit utilization rate would be 50%.
Using too much of your available credit is a red flag by credit scoring models, as it suggests potential financial difficulties. The rule of thumb is to keep this ratio low–ideally below 30%. Higher than that can damage your credit score. But even if your score takes a hit one month due to high usage, you can always recover by reducing your utilization rate the following month.
Before the reporting date
Credit bureaus receive your credit reports from your credit card issuer once a month during the reporting date. If, for example, your payment is due on the 20th, but your issuer reports on the 15th, a $5,000 balance on the 15th could result in a 50% utilization, affecting your credit score even if you pay it off shortly after.
While the reporting date isn’t explicitly stated on your bill, it’s usually around your due date. Paying your bills before the due date can contribute to a more favorable credit report, enhancing overall creditworthiness.
After paying essential expenses
Another good time to pay your credit card bill is when you’ve already paid your essential monthly expenses and still have some extra money left over. Essential expenses may include groceries, transportation, electric bills, utility bills, and more. Instead of spending your extra money on something that may not be necessary or urgent, consider using it to pay off some of your outstanding credit card balance early.
By doing so, you may be able to save on interest payments and other fees over time. Additionally, making early payments can help you stay organized and on top of your finances, which can be especially helpful if you’re trying to manage multiple credit cards or other financial obligations.
As early as possible before the due date
The best way to pay your credit card to avoid interest is by paying them in full and as early as possible before the due date. Experian reported an increase in credit card debt in the consumer credit market due to more people carrying a balance from month to month. Even though you only have to pay at least the minimum amount by the due date, it’s a good idea to pay off your card balance in full monthly so you won’t have to pay interest.
If that’s not possible, you can still lower your interest by settling your credit card bill a bit early. Card issuers charge daily compounded interest, so it can add up fast. Paying just a few days before the deadline can cut down these interest charges and save you some money.
Here’s an example. Suppose you start your 30-day billing month with a balance of $1200:
- If you pay $500 on the last day of the month, your balance is $1,200 for 29 days and $700 for one day. This sets your average daily balance at roughly $1,183. If your credit card has a 15% interest rate, your monthly interest charge would be approximately $14.79.
- Now, shift that $500 payment halfway through the month. Your balance is $1,200 for 15 days and $700 for 15 days. Your average daily balance drops to $950, and your interest charge shrinks to $11.88. You’ve cut your interest payment by over one-fifth by simply nudging up your payment date.
Paying early before the due date can also help you avoid late fees. The Consumer Financial Protection Bureau (CGPB) reported that late payment fees were the most common fees charged by credit card companies, totaling $14.5 billion in 2022. These late payments can have several consequences, possibly harming your credit score.
The later your payment is and the higher your credit score, the more damage a late payment can cause. If you presently have a “good” credit score and make a late payment, you can expect to see a drop of more than 50 points in your credit score.
Cushion is an intuitive money management app that can help you build your credit history and avoid late fees. It consolidates all your bill payments into one screen so you can track them effortlessly. Additionally, the app syncs with your Google Calendar, providing real-time updates and deadline reminders. These ensure your payments are made on time. Safeguard your credit score and avoid penalties by signing up for Cushion.
How does the credit card billing cycle work?
Credit cards operate on a monthly billing cycle consisting of three important dates:
- Statement Closing Date: Marks the end of your billing cycle, where all transactions are compiled to generate a statement. Any activity after this date will appear on your next statement. When your statement is produced, it will show a statement balance. This is calculated by adding new charges and subtracting payments made during the cycle.
- Due Date: The date your payment is due, usually set about three weeks after the statement date. Paying at least the minimum by this date keeps your account in good standing. Failure to pay at least the minimum by this date will result in a late fee.
- Reporting Date: The date when your credit card issuer reports your credit information to the credit bureaus. It’s not mentioned on your bill, but it’s typically around your statement closing date.
Extra tips to pay your bills on time
If you struggle to pay your bills on time, don’t worry; you’re not alone. It’s a common problem that many people face. However, making timely payments is crucial to maintaining good credit and avoiding late fees. Here are some tips to help you pay your bills on time and stay on top of your finances:
- Keep a budget and expenses tracker: Various apps and tools can help you track your bills and payments, create a budget, and avoid overspending.
- Set up automatic payments: One of the easiest ways to ensure you never miss a payment is to set up automatic payments with your bank or credit card issuer. This way, your bills will be paid on time every month without worrying about it.
- Add your bill deadlines to your calendar: It’s important to keep track of when your bills are due to ensure you have enough money in your account to cover them. Adding your bill deadlines to your digital or physical calendar will give you a visual reminder of when each bill is due.
- Sign up for text or email alerts from your issuer: Many credit card issuers and banks offer text or email alerts to remind you of upcoming due dates. You can set up alerts for things like when your bill is due, when a payment has been made, or when you’ve reached a certain spending limit. This can help you avoid late fees, overdraft fees, and other charges that can add up over time.
Frequently Asked Questions (FAQs)
What is the 15/3 rule?
The 15/3 rule is a strategy to pay off your credit card bill that involves making two payments per month. The first payment is made 15 days before the due date, and the second payment is made three days before the due date.
Should I pay off my credit card in full or leave a small balance?
Paying off your credit card in full each month is generally recommended to avoid accruing interest charges and maintain a good credit score. Leaving a small balance may not necessarily harm your credit score, but it will result in you paying more interest charges over time. However, if you’re struggling to make ends meet, paying the minimum payment is better than missing it altogether, which can result in late fees and damage your credit score.
How to pay off credit card debt when you have no money?
Paying off credit card debt when you have no money can be challenging but not impossible. Start by creating a budget, prioritizing debt payments, negotiating with creditors, and seeking help from nonprofit credit counseling agencies. It’s important to avoid taking on more debt and stay committed to your debt repayment plan to achieve financial freedom.
Summary
Enhance your credit scores, reduce interest charges, and avoid additional fees by knowing when to pay your credit card. Stay well-informed about your billing cycle and explore the benefits of making early payments for a healthier financial profile. By managing your credit responsibly, you can build a healthier financial profile.
