You probably already know the golden rule when it comes to credit card management: Always pay your bill on time and in full.
With the average credit card interest rate (on interest-assessing accounts) in 2021 reported to be 17% by the Federal Reserve, the amount you pay in interest can significantly add up when you carry over a balance. Thankfully, it’s easy to avoid costly credit card interest fees as long as you pay off your statement balance in full each month.
There’s another factor you might not have considered. In addition to paying your balance off each month, when you choose to pay your credit card bill also matters. If you’ve wondered whether there are advantages to paying off your credit card before the due date, the answer is yes.
Benefits of Paying Your Credit Card Early
From a credit scoring perspective, paying your bill by its due date is a positive move. Paying your credit card bill early, however, could possibly give your credit score an added boost.
Some of the advantages of paying off a credit card balance early can include:
- Lowers Credit Utilization, Which Can Improve Credit: Your credit utilization ratio (aka the balance-to-limit ratio on your credit cards) will have a major influence on your FICO® Score. Paying off your balance in full or making partial payments before the due date can help to maintain a low credit utilization ratio, which can have a positive effect on your credit score.
- Minimizes Interest Charges: When you carry over a balance, you will need to pay interest on it. If you don’t have the ability to pay off your balance in full every month, even making partial payments before the due date can reduce the overall amount you will have to pay in interest charges.
- Reduces the Chances of Late Fees: While we all try to be diligent with our bills, there may be a time that you either forgot to pay your credit card bill or missed the deadline cutoff time by a few minutes, which can result in a late payment penalty. Paying off a balance in full early can help to minimize this risk.
We’ll go into more detail on how credit reporting works when you pay off your balance on time compared to before the due date.
How Credit Reporting Works
First, it helps to understand how credit reporting works. Many creditors send updated account information to the three credit reporting agencies — Equifax, TransUnion, and Experian — once a month.
With most credit card companies, the monthly credit update happens on or shortly after your statement closing date. And because most card issuers only send updates to the credit bureaus once a month, the balance on your credit report often isn’t the same as the current balance on your credit card account.
Statement Balance vs. Current Balance
When you’re looking at your credit card statement, you’ll see two terms related to your balance: “statement balance” and “current balance.”
- Statement Balance: Your credit report usually will show this balance from your credit card statement. This statement balance is based on the amount of money you owe your credit card issuer on the final day of your account’s billing cycle.
- Current Balance: The current account balance is what you would see if you log in to your credit card app or online portal. This balance represents how much you owe your card issuer in real time (not including purchases or credits that haven’t posted to your account yet).
From a credit scoring standpoint, it’s the balance on your credit report that matters most. Since your statement balance is usually the amount that appears on your credit report, that’s the figure that you want to keep low if you’re trying to maximize your credit score.
How Paying Your Credit Card On Time Impacts Your Credit
On-time payments are a must if you want to earn and keep a good credit score. With a FICO® Score, payment history matters more than any other factors on your credit report. Your bill-paying habits influence 35% of your FICO Score.
When you pay your credit card bill on the due date, you protect your credit report from late payments. The issue with this approach however, is that your credit report might show that you’re utilizing a lot of your credit limit.
Here’s why only paying your credit card on the due date can hurt your credit utilization score:
- Your Balance on the Last Day of Billing Cycle Is Reported to Credit Bureaus: The due date is also called your statement closing date. Your card issuer may report your account balance to the credit bureaus on this date and credit scoring models may use this balance to calculate your credit score. If you only pay your balance once a month on the due date, your accumulated balance will be higher, and this higher statement balance will be the figure reported to credit bureaus.
- Paying on the Due Date Won’t Be Reported as a Zero Balance on a Credit Report: Your payment due date is at least 21 days after the statement closing date. But paying your full outstanding balance on this date wouldn’t bring the balance on your credit report to zero. Instead, your credit report would continue to reflect the balance you owed on your card when the issuer drafted your current statement. If you make more charges between the due date and your next statement closing date (without paying them off right away), then you won’t see a zero balance the next time your credit report updates either.
How Paying Your Credit Card Early Impacts Your Credit
Building on the example above, let’s assume that you don’t wait until the due date to pay off your credit card balance. Instead, you pay your balance to $0 one day prior to the last day of your billing cycle, or even well before your due date.
When the card issuer creates your credit card statement the next day, your account balance would be zero and that zero balance will likely be reported to the credit bureaus as well. This zero balance will eventually show up on your credit reports until the next update cycle occurs.
With a zero balance on your credit report, your credit utilization ratio would also be 0%. From a credit scoring perspective, this is a great position. Reaching 0% credit utilization on a credit card (or — better yet — all of your credit cards) can often improve your credit score.
Other Ways to Lower Your Credit Utilization
Paying your full credit card balance early is one way to keep your credit utilization rate low. But there are also other strategies you can try to maintain low credit utilization and hopefully better credit scores by extension.
1. Open a new credit card.
Opening a new credit card should increase your overall credit limit (from all of your accounts combined). If you owe balances on other credit card accounts, the new available credit limit may trigger a decrease in your overall credit utilization rate.
Keep in mind, you do need to manage your spending and payments on the new account or it could wind up damaging your credit score in the long run. You should only consider opening a new card if you can commit to paying down your credit card balances and avoiding new debt.
2. Consider a balance transfer.
A balance transfer is another possible way to lower your credit utilization and improve your credit score. And if you use a balance transfer wisely, it’s a tool that might help you get out of debt too.
On top of the benefit of a new account (and new additional credit limit), a balance transfer credit card may come with a 0% or low introductory APR. So, transferring high-interest credit card debt to the new account and taking advantage of that lower rate could potentially save you money.
The real magic happens when you combine a balance transfer with an aggressive debt payoff strategy. If you can start to chip away at your outstanding debt, not only can you save money, but you may also see your credit score increase at the same time.
Paying your credit card bill by the due date is a good habit. However, if your goal is to take your credit score to the next level, you might want to consider the possible benefits of paying your credit card balance off before the last day of your billing cycle.