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Paying your credit card bill early is an easy way to mark the task off your list so you don’t forget to pay by the due date. Making payments on time is the minimum requirement to keep your credit card in good standing. What may surprise you is that early payments can also have a beneficial impact on your credit score. However, you can pay too early. Here’s a guide to help you decide if early credit card payments are right for your financial situation.
Understanding the billing cycle
A credit card’s billing cycle is the time between statement closing dates. It is approximately a month long, and it generally ranges between 28 and 31 days. Your statement balance will be increased by a combination of the following transactions:
- Outstanding balance from previous credit card statement.
- Purchases made during the current billing cycle.
- Cash advances taken during the current billing cycle.
- Balance transfers made during the current billing cycle.
- Interest charges on previous outstanding balances.
- Fees from the issuing company.
Certain other transactions will lower your statement balance:
- Payments you have made.
- Statement credits from the issuing company.
The statement balance is also used to determine your minimum payment. Your credit card payment will usually be due 20 to 25 days after your statement date. Your next billing cycle starts immediately.
Statement closing date vs. billing due date
There are two very important dates you must keep track of monthly when you have a credit card. Your billing due date is the same day every month. It only varies when the due date falls on a holiday or weekend, in which case it will be postponed to the following business day. The billing cycle, as mentioned above, may vary in length by a few days depending on the number of days in the month.
The statement closing date is the last date on your statement’s billing cycle. All transactions that have cleared—and are not still pending—by the statement closing date will appear on your credit card statement. The following date is the beginning of the next billing cycle. All transactions that clear after the statement closing date will appear on the next credit card statement.
The billing due date is the date by which you must make a payment or incur interest charges. If you pay your bill in full by the billing due date, you will completely forego interest charges. If you make at least the minimum payment, you will start to incur interest charges on the outstanding balance but will maintain your good standing with the issuer. You may be able to avoid interest charges on an outstanding balance if you are in a 0% promotional annual percentage rate (APR) period.
Benefits of paying your bill early
There are multiple benefits to paying your bill early. You will save money on interest charges by paying your bill in full early. You will not have to worry about forgetting to make a payment by the billing due date if you’ve already paid your bill. Best yet, you may even improve your credit score by lowering your credit card balance throughout your billing cycle.
Save money on interest
To save money on unnecessary interest charges, be sure your payment is made in full and on time. To ensure that your payment is on time, it is always a good idea to pay a few days in advance of your billing due date. This is especially true if you are mailing in a credit card payment.
If you are unable to pay your credit card in full, you will be carrying a balance over from one billing cycle to another. That balance will start accruing interest. Paying early in the next billing cycle will help to lower the total amount of interest that you will pay on this balance.
For example, assume you start a 30-day billing cycle with a $1,000 balance and pay $500 on the statement closing date. Your average daily balance would be $983.33 ($1,000 per day for 29 days and $500 for one day). On the other hand, if you paid the same $500 halfway through the billing cycle, you would have an average daily balance of $750 ($1,000 per day for 15 days and $500 per day for 15 days). As interest charges are based on your average daily balance, the earlier payment is more beneficial.
Help your credit score
Your credit card utilization is one of many factors that credit bureaus look at to determine your credit score. It impacts up to 30% of your credit score, so it is one of the more important factors that influence your credit score. It is typically depicted as a ratio.
Your credit utilization ratio is the amount of revolving credit that you are currently using divided by your total credit limit. For example, if you have a $5,000 credit limit on your credit card and a balance of $2,500, your credit utilization ratio is 50%. Credit bureaus prefer to see a credit utilization ratio of less than 30%. If it is above 30%, your credit score may be negatively affected.
You can keep your credit utilization ratio lower by making multiple early payments rather than one lump sum at the billing due date. This lowers your outstanding balance at any point in time during the billing cycle, lowering your credit utilization. It may even improve your credit score if it keeps you below 30% credit utilization.
Reasons you might not want to pay your credit card bill early
Paying your credit card bill early is a great idea in many cases. However, there are a couple of reasons you may not want to pay your credit card bill early.
You may still owe a second payment if you pay too early
If you send in your payment before the statement closing date, it will be applied to the current billing cycle and reduce the balance that appears on the statement. If, after your early payment, you still have a balance on your statement, you will still have a minimum payment due on the billing due date to keep your account in good standing. If you fail to make the minimum payment between the statement closing date and billing due date, you could risk your good standing with the issuer.
To keep money in your bank account for emergencies
If you are consistently under your 30% credit utilization ratio and always make your monthly payments on time, you may prefer to keep the money in your bank account in case of emergencies. Some vendors do not take credit card payments. If you have an issue pop up that requires cash or a check, you’ll need to have the money in your bank account.
Other ways to maintain a healthy credit
The best way to maintain a healthy credit score is to pay your credit card bill in full and on time every month. A late payment will negatively affect your credit score and maintaining a rolling balance will keep your credit utilization higher. There are several other ways you can improve your credit utilization in addition to making on-time or early payments on your credit card.
Keep any zero-balance credit card accounts open
If you keep open old credit card accounts that have zero balances, your total credit limit will be higher while your utilization remains low. Unfortunately, some issuers may close your account if you do not utilize your credit after a certain amount of time. Be sure to make and immediately pay off small purchases—typically annually—in order to keep your zero-balance account in good standing.
Request credit limit increase
You can also request a credit limit increase from your credit card issuer. It will be more likely to approve an increase if you have been diligent about making payments on time in the past. Of course, you should always make sure never to charge funds above your credit limit, as the repercussions can be severe.
Open a new credit account
Similar to the theory of keeping open any old zero balance credit card accounts, you can also improve your credit utilization by opening a new credit card account. It will increase your total credit limit. Be careful not to increase your spending to match, and you will improve your credit score. Here are some of the best credit cards to open.
TIME Stamp: Improve your credit score by paying your bill early
If you know that early credit card payments will keep you from forgetting a billing due date, pay your bill early. If making multiple payments throughout the billing cycle will keep your credit utilization ratio under 30%, pay your bill early. Such a ratio is key for maintaining a healthy credit score or improving your low credit score. Above all else, make sure your payments are on time. If possible, pay your bill in full every month to avoid rolling a balance over to the next statement and incurring interest charges.
Frequently asked questions (FAQs)
What is the 15/3 rule?
The 15/3 rule is a credit card payment strategy that you can use to lower your credit utilization. With the 15/3 rule, you make two payments each statement period. You pay half the credit card balance 15 days before the due date and the second half three days before the due date. This method ensures that your credit utilization ratio stays lower over the duration of the statement period.
Should I pay off my credit card in full or leave a small balance?
It is a myth that leaving a small balance on your credit card will improve your credit score. If possible, you should always pay off your credit card in full. Leaving a small balance will not improve your credit score, and it will tack on interest charges that you could otherwise avoid with a full payment. The best strategy for a healthy credit score is to make small periodic purchases and pay the bill in full. This will ensure that you have a low credit utilization while avoiding unnecessary interest charges.
Does making two payments a month help my credit score?
Making two payments a month helps your credit score in the sense that it will keep your credit utilization down. For example, assume you have a credit card with a $10,000 balance and routinely spend $4,500 per month on it. If you were to wait until the due date to pay the $4,500 in full, you would have a credit utilization ratio of 45% ($4,500 / $10,000). As 30% or lower is the ideal credit utilization ratio, a single credit card payment is not your best option. Paying half your bill twice a month—such as with the 15/3 rule—would keep your credit utilization ratio at 22.5% or less throughout the month.
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