Credit cards give you the option to pay for purchases over time. As an added bonus, they can also offer rewards for the purchases you make. A card provider agrees to give you a line of credit for spending and you agree to pay at least the minimum payment on any balance you carry with them.
Your bill will arrive a week or two after each billing cycle with all the charges you made during that period and the minimum amount due. As long as you keep your account in good standing and make the appropriate payments, your credit line will remain open and usable.
Even better than making the minimum payment is being able to pay off the balance for each billing period. Here’s why.
Pros of paying in full each month
One of the benefits of making a purchase with a credit card is that you can buy now and pay later. However, the longer it takes for you to pay off a purchase, the more interest you will accrue on your balance. Credit card interest begins to add up whenever an unpaid balance is carried from one month to the next. So if you only pay the minimum due, you start paying interest on the rest. However, if you pay your balance in full each month, you’re only paying for what you actually spent on the card. Paying off your balance will help you save on interest and maintain your credit score
Save on interest
The only way to avoid paying a lot in interest is to pay on time and to pay in full. If you are in a 0% APR period, you won’t have to worry about interest yet. However, 0% APR periods typically last between 15 and 21 months depending on your card issuer. After this period, you’ll be looking at normal interest rates that can reach as high as 27%. Paying off your balance for each billing cycle can help you save on interest because there is no balance to build interest on.
Let’s say your current card balance is $1,200 and your APR is 18%. Using our credit card payoff calculator, if you make a minimum payment of $50 each month, you’ll be looking at paying $298 in added interest. Plus, at that rate it will take you 30 months to pay it off. And that’s assuming that your APR is fixed at 18%. Most cards have a variable APR that can flow between about 14% and 27%. That means the interest you pay could go up the longer you carry a balance on your card.
Help your credit score
Payment history makes up 35% of your total credit score. Paying on time is incredibly important for keeping your credit score in good standing. If you are paying the minimum every billing cycle, your payment history will be in good standing. However, another important factor of your credit score is your credit utilization rate or your credit to debt ratio. This factor makes up 30% of your total credit score and is directly linked to how much of your credit you are using compared to how much you have available. Ideally, you want to keep this ratio low, with the recommendation being somewhere below 30%.
Let’s say you have two credit cards that offer you a total of $10,000 in credit. If the balance on one card is $2,500 and on the other is $1,300, that means you’ve used $3,800 of your available credit. That translates to a 38% credit utilization rate, which is over the recommended ratio. If you add in the interest that will be applied to these balances you have the potential to reach a 48% credit utilization rate. That means you’re using almost half of your available credit. Paying off your balance at the end of each billing cycle helps free up that usable credit and lower your credit to debt ratio.
Pros of paying your credit card bill early
Paying in full is great, but paying early and often is even better. If you carry a balance but pay earlier in the month, you could be looking at avoiding interest entirely. And if you’re not able to pay in full through one payment, you can make multiple payments to pay off your balance. Even if you are not paying in full, early payment reduces your monthly balance, and in turn your utilization ratio, which has a positive effect on your credit score.
Most credit issuers report updated information to consumer reporting agencies every month. The balance reported to the consumer bureaus is the one at your statement’s closing date, which you can find on your statement or call your issuer to confirm. You can also ask what date balances will be reported to have an idea of when to make an early payment. When you put a charge on your card, you can plan to pay it off immediately or make payments on a weekly basis to reduce or eliminate your card balance. This tactic is also a great way to help you stay on budget with your credit card spending.
Cons of paying your credit card bill early
In general, paying off your credit card early is a positive thing. However, a potential con may be that you have to be more strict about your spending budget. A good rule of thumb is to budget for how you will pay off a purchase before you make it. You can use Bankrate’s credit card payoff calculator to help you figure out how long it will take to pay off a purchase.
Another thing to keep in mind when paying early and often is that you want your credit utilization ratio to be low, but not zero. There should be some activity on your cards or you may see your credit score dip by a few points. The ideal range for credit utilization is 10% to 30%. For example, if your total available credit is $10,000, you want to use between $1,000 and $3,000 of your available credit.
Tips for staying on top of your credit card bill
Make a budget and stick to it.
Credit cards make spending easy, so it’s important to have a budget in mind for your credit card. You can use Bankrate’s budget calculator to help you figure out what amount is the best for your current situation.
Keep up with opening and closing dates for your billing cycle.
You can set reminders so that you are always notified. Also keep an eye on your interest rate to make sure you are making your payment calculations with the most current APR.
Review your statements.
When your statement comes, review it carefully to make sure there are no errors or fraudulent charges. You can also keep tabs on your account before your statement arrives by logging into your issuer’s website.
While paying early and paying in full will have a great effect on your credit score, there is another way to have a similar effect. Simply pay on time and keep your balances low through budgeted spending. If you can get your credit utilization rate to below 25%, you’ll see a positive effect on your credit score and your ability to get credit in the future. And if you’re curious about where your score stands, you can use Bankrate’s free credit reporting tool to find out.