Paying off your credit card when the bill is due is crucial to avoiding costly interest charges. Most cards have high interest rates, but you won’t have to pay finance charges if your balance is paid in full.
In some cases, however, you may want to pay the amount owed on your credit card. before the due date on your statement. Here’s why.
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A good reason to pay off your credit card balance sooner
Paying off your credit card before your bill is due could be a smart financial decision based on two factors:
- When your card issuer reports your balance to credit bureaus
- How high is your balance
You see, many people charge a large portion of their purchases on credit cards so that they can earn rewards. This can be smart since you end up recouping a percentage of your purchasing costs. But it can also lead to a high credit card balance, at least until you make your payment and the debt is paid off.
The problem is, credit card companies don’t always share information about your credit usage. after you’ve paid your bill. And what can end up happening is that the company reports your balance when it’s high – even if you end up paying the full amount within days or weeks.
When information about your credit usage is reported, your card balance and the minimum payment based on that balance are used to determine your credit score. And it is shown to other lenders that you can borrow money from. This can be a problem for several reasons.
How a high balance can affect your credit score
When your credit score is calculated, the credit reporting agencies look at the credit you have used against the credit you have. If your card company reports a high balance – even if you end up paying it off soon after it’s been reported – it can give the impression that you have a high credit usage rate. It is the ratio of credit used to available credit. A ratio greater than 30% damages your credit score, while a lower credit utilization ratio can help you achieve a higher credit score.
When trying to borrow, lenders also look at your debt against income. If you show a high credit card balance on your report, it can give the impression that you have a high monthly payment, even if your balance was paid off soon after it was reported to the credit bureaus. This could affect the amount you are allowed to borrow.
If you don’t want to affect your credit score or compromise your borrowing ability, you might want to know when the credit card company will report your balance to the credit bureaus. Then make your payment before it happens, even if it’s before the invoice is actually due. You can ask your creditor this question, or you can look at your credit report and see what balance is being reported and determine what date your card showed that balance.
By paying your bill earlier than expected, you can ensure that a lower balance is reported, preserving both your credit score and your low debt-to-income ratio, so that you appear to be a well-qualified borrower.