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For many people, a credit card’s lifecycle is pretty consistent: charge purchases throughout the month, receive a bill at the end of the billing cycle, pay at least the minimum before your due date, repeat.
It’s a good, basic approach. Consistently paying your bills on time and in full is one of the most effective ways to improve or maintain your credit. That’s because payment history is the most influential factor in credit scoring models — accounting for 35% of your overall score, according to FICO.
What if there was another way to pay your credit card bills, which still established that payment history over time but also offered more immediate benefits?
Paying off your credit card early – and thus keeping your balance lower throughout the month – can reduce the balance your issuer reports each month to the credit bureaus. This lowers your credit utilization ratio and has a direct effect on the second-most influential credit scoring factor (accounting for 30% of your overall score): amounts owed. It can also help you reduce the amount of interest you owe every month.
Here’s how you can strategize your credit card payments to use this approach:
To have the greatest positive effect on your credit, always pay your statement balance in full — or at least your minimum payment owed — by the due date. Missing your payment due date even one time can result in hefty fees and potentially a hit to your credit score.
How Paying Your Credit Card Bill Early Affects Your Credit Score
Paying off your credit card bill early might look something like this:
- Make charges throughout the month
- Submit full or partial payments within the billing cycle
- Receive a bill on remaining charges when the statement period closes
- Pay at least the minimum due before the due date
The main benefit is to keep a lower credit utilization ratio.
“For a lot of people, this is the quickest, most actionable thing they can do to improve their credit,” says Ted Rossman, industry analyst at CreditCards.com.
Your credit utilization ratio is the amount of credit you use each month relative to the amount you have available. Generally, experts recommend keeping this rate below 30%, but the “highest-achieving” credit users report average utilization closer to 10%.
If your credit utilization consistently reports above this threshold, it could be keeping you from a great credit rating. But if you pay some or all of your balance before your monthly card usage is reported, you can reduce your utilization ratio for that period, potentially having a positive effect on your score. This is true whether you carry a balance from month-to-month or you always pay your balances in full.
Consider this example, which shows how an extra payment midway through the billing cycle can affect how your issuer reports utilization to the credit bureaus:
|Total Monthly Charges||Mid-billing Cycle Extra Payment||Amount Due on Monthly Statement||Reported Credit Utilization|
Factors to Consider
Statement Closing Date
If you want to pay your credit card bill early, make sure you know the date your billing cycle closes each month. You’ll need to pay before this date to have an effect on your credit utilization.
“Typically, the day following the billing cycle or statement end date is when a credit card company reports to the credit reporting agencies,” says Amy Thomann, head of consumer credit education at TransUnion. “Every lender is different, so it’s a good idea to contact them if you have any questions or would like more specific details on how they report payments.”
Rossman recommends checking your credit report for clues, as well. You may be able to determine when your usage was reported by cross-referencing the amount on your report with what appears on your credit card statement.
It may take some testing, but you can generally assume that you should make any extra or early payments before your statement closing date each cycle to lower your reported credit utilization.
Your overall credit utilization rate can be affected just as much by your credit limit as it can by your spending. And if you haven’t checked on your credit card limits lately, you might be surprised by what you find.
“A lot of issuers have been cutting limits proactively, because they’re worried about risk from the economy and jobs and maybe not getting paid back,” Rossman says. “Sometimes it’s because of inactivity, and sometimes it’s because you’re doing something that looks risky like getting close to your limit or paying late.”
With credit card issuers being more strict with their lending standards and wary about the money they lend to consumers, it’s particularly important to know your credit limit and monitor it over time.
Two people who charge the exact same amount each month can have completely different credit utilization ratios depending on their credit limit. This, in turn, can result in major differences in their credit scores, even if spending, number of credit cards, and positive payment history is identical.
|Monthly Charges||Credit Limit||Reported Credit Utilization|
Paying Down Credit Card Debt
Paying your credit card off before the due date, or making multiple payments each month, can be especially beneficial for cardholders who are working to pay down debt balances.
“If you want to split it up and pay some on this payday and some when you get paid two weeks later, getting it in earlier can help you from a credit score standpoint, but also very much so from an interest standpoint if you are carrying a balance,” Rossman says.
Early or extra payments can make a big difference in the amount of interest you pay over time.
Interest on credit card balances accrues daily based on your current balance. For example, if you have a $2,000 balance on a card with a 20% APR, your balance accrues about .055% interest every day. That means today’s $2,000 balance will increase to $2,001.10 tomorrow, then that new balance will accrue interest, bringing the third day’s total balance to $2,002.20.
Because interest accrues daily, the less time a balance has to accrue interest, the less you’ll pay in total. Instead of waiting until your next payment is due, paying at least a portion throughout the month can reduce the amount available for interest to compound upon each day from that point until the end of the month.
The Limits of Payment Strategy
If you’re not practicing good credit habits regularly, switching up the way you pay your credit card balance isn’t going to be a quick fix.
“The most important thing to remember is to pay on time, every time to avoid late payments,” said a spokesperson from Equifax in a statement via email. “Spend within your means to avoid high credit utilization or worse, to not have the funds to pay off your bills.”
Credit utilization does greatly influence your score, but payment history is still the most influential factor. Negative payment history, such as missed or late payments can have lasting effects on your score. Reported late payments can remain on your credit report for up to seven years, according to Equifax, and even a single late or missed payment can cause a drop in your score (in addition to the resulting fees from your issuer).
No amount of strategizing when to pay your bill can outweigh high debt balances that keep your utilization perennially high or frequent delinquent payments. Getting your utilization down each month can be a great tool, but achieving excellent credit ultimately relies on consistent, long-term healthy credit habits.