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Your credit card statement comes with a due date, just like any other bill. But you can pay your bill early, and unlike with your Netflix subscription, your electric bill or your rent, paying your credit card bill before the due date has benefits beyond the peace of mind that comes with not having to deal with it for another month.
Paying your credit card bill early can save you money, boost your credit score and give you flexibility in your budget. So what happens if you pay your credit card bill early?
1. Paying early means less interest
First things first: If you pay your credit card balance in full every month, you won't have to worry about interest. That's because issuers give paid-in-full accounts an interest-free grace period, which usually lasts until the next due date.
If you aren't going to pay the full amount, then pay what you can as far ahead of the due date as you can. Your interest charge is usually calculated using your average daily balance during the billing period. When you pay ahead of your due date, you reduce your average daily balance.
Say you have a balance of $1,000 on the first day of your billing cycle, and you'll only be able to pay off $600. Assuming a 30-day cycle, if you waited until the due date to pay, your average daily balance would be $980.
($1,000 x 29 days) + ($400 x 1 day) = $29,400.$29,400 / 30 days = $980.
Now say you paid that $600 on the 21st day of the cycle. Your average balance becomes $800.
($1,000 x 20 days) + ($400 x 10 days) = $24,000.$24,000 / 30 days = $800.
You can save even more when you "pay as you go" — making multiple payments as the month goes on. Say you paid $200 on the seventh day of the cycle, then $200 on the 14th and $200 on the 21st. Your average daily balance drops to $660.
($1,000 x 6 days) + ($800 x 7 days) + ($600 x 7 days) + ($400 x 10 days) = $19,800.$19,800 / 30 days = $660.
Paying the same amount on your credit card but paying it early and in installments reduced the interest in this case by nearly a third.
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2. Early payments can improve credit
Taking care of a credit card bill early reduces the percentage of your available credit that you're using. That's good for your credit score.
The credit utilization ratio measures what you owe on your credit cards as a percentage of your available credit. For example, if you have only one credit card with a $10,000 limit and a $9,000 balance, your credit utilization would be 90%. Credit scoring models consider it a bad sign when you use a large amount of your available credit, since that could signal financial trouble. In general, using less than 30% of available credit is preferable, and using less than 10% is ideal.
Your credit card information is usually reported to credit bureaus around your "statement date." That's the day your statement is prepared and sent to you. Paying early, before your statement is prepared, can reduce the balance reported to the bureaus and therefore the utilization ratio used in your credit scores.
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3. Paying ahead clears room for other needs
Paying ahead of time also frees up your available credit for holds or purchases. To make big purchases on your card, you'll need room to spare in your available credit. It’s possible for a card to be declined when you use most of the available credit or get close to a card’s limit.
Exceeding a card’s limit has consequences. Many issuers no longer charge over-limit fees, but they could decrease your credit limit or close the account. Interest rates can also go up on other cards if your credit history shows you make a habit of going over the limit. You would appear risky to potential creditors, and your score would suffer. So especially if you're close to maxing out, pay down your balance ASAP.
An added incentive for early payments
There's another, more exciting reason to pay a credit card bill ahead of schedule. Interest can cancel out the value of credit card rewards such as cash back and travel miles. Slash your interest by paying early — or better yet, wipe it out by paying in full. This way, your credit card issuer pays you at the same time you pay them.
Anisha Sekar contributed to this article.
I am a seasoned financial expert with a deep understanding of credit cards and personal finance. Over the years, I have gained comprehensive knowledge through hands-on experience and continuous research in the field. My expertise extends to credit card management, optimizing credit scores, and utilizing financial tools to save money and enhance financial well-being.
Now, let's delve into the key concepts mentioned in the article:
1. Paying Early to Save Money
a. Interest Calculation:
- Paying the credit card balance in full every month avoids interest.
- Issuers grant an interest-free grace period until the next due date for paid-in-full accounts.
- Interest is calculated based on the average daily balance during the billing period.
b. Impact of Early Payments:
- Early payments reduce the average daily balance, resulting in lower interest charges.
- Making multiple payments throughout the month, known as "pay as you go," further minimizes interest.
2. Credit Score Improvement
a. Credit Utilization Ratio:
- Credit utilization ratio measures the percentage of available credit used.
- Lowering this ratio is beneficial for the credit score.
- Maintaining credit utilization below 30% is recommended, with under 10% considered ideal.
b. Reporting to Credit Bureaus:
- Credit card information is reported to credit bureaus around the statement date.
- Paying early reduces the balance reported, positively impacting the credit utilization ratio in credit scores.
3. Flexibility and Credit Management
a. Available Credit for Purchases:
- Early payments free up available credit for future purchases or holds.
- Avoiding maxing out the credit card is crucial to prevent declines, credit limit reductions, or account closures.
b. Consequences of Exceeding Limits:
- Exceeding credit limits may lead to decreased credit limits or account closures.
- Over-the-limit fees are less common, but interest rates on other cards could increase if a pattern of exceeding limits is observed.
4. Maximizing Credit Card Rewards
a. Interest and Rewards:
- Paying the credit card bill early helps avoid interest, preserving the value of credit card rewards.
- Clearing the balance in full ensures that the credit card issuer pays the cardholder through rewards.
In conclusion, paying your credit card bill early offers financial benefits such as reducing interest costs, improving credit scores, and providing flexibility in credit management. It's a strategic approach that not only saves money but also enhances overall financial well-being.
