Learn When Paying Your Credit Card Bill Before Its Due Makes Sense
You might say the earlier youâre able to pay something off, the better it will be for you in the long run. But does that hold true for credit cards?
The short answer is yes, there can be benefits to paying off your credit card early. Read on to better understand how to use this information to help boost your credit scores
Is It Better To Pay In Full Or Carry A Small Balance
Paying your balances in full every month demonstrates that you are living fully within your means. In other words, you are not using to extend your income, but as a way to spend the income you already have. This is the best sign of overall financial health.
Some high credit score achievers may carry a small balance in order to demonstrate that they are using the credit they have been given. There is a school of thought that says this is necessary to show they use their credit in a responsible way.
The key here is to know when your credit card issuer reports your account information to the credit bureaus. In many cases, that will be at the end of your billing cycle. Your balance on that day will be whats reported to the bureaus, and it will be factored into your credit utilization. So, in theory, you could keep a small balance on that date and then pay it off the next day to show some account activity and avoid interest charges.
Hitting 1 percent seems to be the holy grail here. However, I am not a fan of chasing the perfect score, and trying to get to 1 percent may be a lot more trouble than it will ultimately be worth.
Consider Additional Sources Of Income To Pay Off Credit Card Debt
But what if you don’t have any additional cash at the end of the day, or the month, to pay down card debt?
That might be the reason you got into debt to begin with — and that’s OK. We’ve all been there. But adding an extra source of income can help you tackle any kind of debt faster, including your credit card’s.
Here are a few ideas you can try to earn more disposable income and pay down credit card debt:
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How Making Minimum Payments Can Cost You
Payment history is the most heavily weighted , so making credit card payments on time every month is essential to keeping your credit in good shape. It also helps you avoid late fees.
If you only make minimum payments each month, however, you’ll pay interest on the remaining balance that carries over to the next billing period. Plus, most credit cards charge compounding interest, which can make credit card debt snowball fast and take years to repay.
Say you owe $3,000 on a credit card with an 18% annual percent rate , and your minimum payment is 3% of the balance or $25, whichever is greater. If you make just the minimum payments, it will take you nearly 14 years to pay off the debt. On top of that, it will cost you almost $2,700 in interest, nearly doubling the amount you owed originally.
Leverage Your Credit With A Zero Percent Credit Card
If you don’t carry a balance on your credit card right now, congratulations! But if you have good credit, you might still want to consider applying for a no-interest credit card. Even if you pay your balance in full every month, there may be some benefits in the midst of rising interest rates. You can pay for a big-ticket purchase interest-free, or have a zero percent card on hand in case of emergency.
Improving your credit utilization ratio and upping your number of accounts by opening a new credit card can be beneficial for your credit score, too. This type of simple move could be really beneficial for you in the long run, particularly if you plan to finance a home, auto or other big purchase in the future.
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How To Use A Credit Card: Best Practices Explained
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Whether you’ve been using credit cards for years or you’re applying for your first one, they can be confusing. Depending on how you use them, credit cards can either be incredibly dangerous or immensely helpful. This guide will walk you through what you need to know about using a credit card, building credit and earning rewards.
Paying The Credit Card Balance In Full
If you can, paying the balance in full each statement period is the better option. If you pay off the balance in its entirety, it can help you save some serious money by helping you avoid costly interest payments. Paying in full may also help your credit score. In addition to consistently making on-time payments, youll be in the good habit of keeping your balances low across your credit card accounts. Your credit utilization, how much of your available credit youre using, is an important factor in calculating your credit score. In general, the lower your utilization is, the better it is for your score.
If your available limit across your credit card accounts is $5,000 and you have combined balances of $4,000, your credit utilization is at 80%. Youd want to get that down as low as possiblea good benchmark to start is below 30%. For continued healthy credit, its best to try to not let balances get too high at any point. When credit card balances grow close to the limit each month, you may see your score fluctuate as well.
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Use The Credit Card As A Budgeting Tool
If youre confident you can use a credit card responsibly and pay off the balance every month, try using it as a budgeting tool. By making all of your purchases with your credit card, you can see exactly how much youve spent at the end of the month. Of course, you should only do this if you know you can pay off the balance each month. To make sure your credit card spending doesnt get out of hand, never charge more to your card than you have in your bank account.
How To Use A Balance Transfer To Pay Off A Credit Card
A balance transfer is the only time you can use one credit card to pay off another. And the only scenario where it makes good financial sense to pay off a credit card bill this way is if youre shifting a credit card balance to one with a lower interest rate, especially to a card that has an introductory 0% APR offer.
When you transfer a balance from a card thats being charged interest to one that has no interest for a limited period of time, you can save money. Heres why.
Say you have a $10,000 balance on a card that carries an 18% APR. If you do nothing for a year, youll have added an additional $1,800 to your debt. If you transfer that balance to a card with an introductory 12-month 0% APR offer instead, you wont be charged any interest for that year. But there are some nuances to the process.
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Staying On Top Of Your Credit Card Bills Is A Key Part Of Building And Maintaining Strong Credit
Payment history is a key component of your credit scores and missing even one payment could have an impact that includes late fees or a higher interest rate in the future. Fortunately, it doesnt take too much effort to manage once you know what to look out for.
So what, exactly, do you need to know about paying your monthly bill? Heres a brief overview that can help you get and stay on top of your payments.
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You Must Carry A Balance To Build Credit
Some people believe the only way to build credit using a credit card is to maintain a balance. If you pay it off each month, it no longer helps.
This is untrue. Every time you pay your credit card bill on time whether youre paying it off or making the minimum payment you get a positive mark on your credit report. Over time, these positive marks can result in credit score increases, which may open you up to more loan options and lower interest rates.
When you carry a credit card balance from month to month, these positive marks come at the expense of interest charges. However, if you pay off your credit card in full every month, you get a positive mark with no interest charges. It’s a win-win.
How To Avoid Interest Charges
Your credit card company doesn’t immediately apply the accrued interest charges to your account after your credit card billing cycle ends. Instead, most credit card issuers offer an interest grace period that runs from the final day of your billing cycle through your payment due date.
During the interest grace period, the credit card issuer will not apply interest charges to your account. If you don’t pay off the balance in full by the due date, the credit card company will charge you interest on the unpaid balance.
With some credit cards carrying interest rates in the mid-20% range, the charges can be significant.
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Should You Carry A Balance On Your Credit Card
Many people believe that you need to carry over a balance from month to month on your cards in order to build credit, but thats just a myth.
What actually helps build credit is regularly paying your credit card bill on time. In fact, if you carry a balance, you may end up having to pay hefty amounts of interest with no benefits to your credit whatsoever.
We recommend avoiding carrying a balance whenever possible. In the case that youre unable to pay off your balance in full, ensure you make at least the minimum payment.
If your credit card balances are starting to build up and youre getting caught up in interest payments, you may want to consider a balance transfer card, especially one that offers a 0% introductory APR period.
Build Your Credit Score
Here are a few tips to build your credit score:
- Pay your bills on time: Successful payments are recorded in your credit report and contribute up to 35 percent of your credit score.
- Keep an eye on your credit utilization rate: Credit utilization rate, one of the biggest factors impacting your credit score, is calculated by taking the credit and loan balances you currently owe and dividing them by the total limits of your credit lines. The optimal is less than 30 percent. For example, if you have one credit card with a limit of $1000 and you currently owe $250, your credit utilization rate is 250/1000 . Two ways to keep your credit utilization ratio low are by keeping credit card balances low and extending your credit limits. Use both tactics when you are confident that you can manage your credit spending and payments carefully.
- Keep your credit card open: Even if you pay off the entire balance of your card, keeping a card open can extend the age of your credit card and of your credit history. The age of your credit, in turn, provides 10 percent of your credit score. But check the card’s terms and continue to monitor your monthly statements, just to be sure that there are no penalties attached to keeping a zero balance on a card.
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To Pay Less Interest On Debt Pay Asap
Credit card users who always follow Rule #1 need never worry about paying interest. But for those carrying a balance, its important to know how the amount of interest owed is determined. Each month, credit card companies take an average of the balance owed by a cardholder on each day of the billing period. This is known as an average daily balance. This number is applied to the cardholders specific interest rate.
Out of convenience, cardholders in debt sometimes wait until the due date of their next bill to finish paying off the previous months balance. This means that for every day the payee might have had the money to pay even part of that bill off they were still on record as owing the full value of their balance. If instead they paid off their balance halfway through the billing period, their average daily balance for that period would drop by half. If halfway through the period they were able to pay off, say, only a quarter of their debt, they could still reduce their average daily balance by over 12%. Any amount paid down at any time during the period can reduce the daily average balance.
Rather than deciding to pay at the beginning or the end of their billing period, cardholders in debt should simply keep working away at what they owe as they can, knowing that its not just the total paid off at the end of the month that matters, but the timing, too.
Why I Pay Off My Credit Card Weekly And You Should Too
Like many older millennials I had the great fortune of going to college when it was still legal to aggressively target students for credit cards. Who wouldnt hand over her Social Security number for a free t-shirt and some pens? The ease at which a college student could get into debt should have concerned parents more than keggers or the threat of an illicit affair with a hunky professor. Luckily, I had two secret weapons:
Keeping my parents advice in mind, I only got one credit card and used it once or twice a month to buy a tank of gas. But impatience got the better of me when it came to paying the bill. As soon as my transaction posted, Id immediately pay off the balance. These days, nearly a decade after my freshman year of college, Ive created a riff on this strategy: pay off my credit cards weekly. Its a two-fold plan to keep my budget in check and my credit score strong. Heres why you should implement it too.
Keeping the budget on track
Once youve got an understanding of exactly how much wiggle room you have each month, which is determined by the difference between your income and monthly expenses, then youll find how paying off credit cards weekly keeps you from overspending.
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Should You Pay Off Your Credit Card Every Month Yes
For most people, making that final payment to wipe out a credit card balance is a special event. Many clients we work with spend years grinding toward that final goal.
But that isnt the way its supposed to be. If youre using credit cards wisely, youre paying off your balances in full every single month. Even better, pay off your credit card after every purchase, and dont even wait for the monthly bill to come.
If you keep your credit card use under control and pay off the entire balance each month, you are operating under the best-case scenario you get the positive impact to your credit score that comes from healthy credit card activity, and you pay little to nothing in the way of fees and interest for using the credit card.
Getting into this healthy routine of using your credit cards sparingly and paying off the balances in full every month isnt easy the credit card companies make more money if you carry big balances from month to month, so thats what they encourage. Its up to each of us to resist the temptation to charge more than we can afford to repay at the end of the month.