Should I Pay My Credit Card Early?

Paying your credit card before your payment date (the cut-off date) each month has its benefits. You will say, “Obviously, if I don’t want to pay interest, I should pay off my credit card as soon as possible.” But you may be surprised at the added benefits of being cautious.

• Should I pay off my card as soon as I can?
• Does paying my card early affect my credit history?
• Understanding the cutoff date
• The difference between advance payments and additional payments
• The best time to pay your credit card

Should I pay off my card as soon as I can?

Chances are you already know the importance of paying your credit card on time. If not, don’t worry, when they charge you interest you will realize it. Ok, just kidding. It is very important that you pay your credit card so that you avoid paying high interest and damaging your history in the credit bureau.

What you may not know yet is that the “when” to pay a card has a more complex strategy. Paying it off a couple of weeks early can benefit your credit bureau score. This has to do with the relationship between credit card payment cycles and the credit bureau. It can get a bit technical, but….

The answer is yes, you should pay off your card as soon as possible. Personally, I try to pay my card as soon as I can for 3 reasons:

• So I only spend what I know I can afford
• I constantly review my expenses and see that everything is in order
• I eliminate the persistent worry to remember my payment deadline

Does paying my card early affect my credit history?

The reality is that banks do not penalize you for paying your credit card early. These only report if you are up to date with your payments or if you have stopped paying your card. Even making the minimum payment so as not to fall into late fees is considered to be on time. However, having an outstanding balance from one month to the next will generate interest. It is better to pay your card 100% if possible.

However, if there is a case where making minimum payments can harm your credit history. If you are stuck making minimum payments and carry outstanding balances from one month to the next, this can damage your credit profile. What we recommend is never to max out your card. If you wish for more specific advice, never have an outstanding balance of more than 30% of your credit limit of your card.

“But why only 30% if I have more credit available?” This is because banks give you a larger line of credit than they think you can pay in a month (Remember the point of the product is to make money, and they make money off the interest you pay on the remaining balance). To credit analysts, using only 30% of your credit capacity will look much better than having a card maxed out.

This is when you realize the added benefits of making extra payments early. By making payments to your account before the cut-off date instead of the payment due date, you can lower your utilization rate. The utilization rate is the percentage of 30 that I mentioned previously. Here I show you how it works.

Your cut-off date usually arrives 21 days before your payment deadline (this can vary between banks). When your cut-off date arrives, a few important things happen that you should be aware of:

• The bank calculates how much it is going to charge you in interest and the minimum payment so as not to get into default.
• Your account statement is generated and delivered to you.
• Your outstanding balance to be paid is reported to the credit bureau.

This is why making payments before your cut-off date will help you reduce the outstanding balance that banks report. And therefore you also improve your credit utilization that the bureau uses, among dozens of other factors, to calculate your score.

Understanding the cutoff date

Cut off dates and payment deadlines can be a bit confusing. However, it is still crucial that you identify these dates. You can review each one in your account statements or in your initial account opening contract.

You can also calculate the number of days between the start and end dates of your billing period from the dates on your statement. The next cut-off date of your next statement will be that number of days you just calculated, regardless of your payment due date.

In the vast majority of cards, there is a grace period for payments to avoid paying interest as long as you pay the entire balance of your card month after month.

I know it’s easier said than done, but if you can pay off your card in full each month before your cut-off date, it pays off. This benefit is shown in your credit bureau since it will appear in your credit bureau that you do not have outstanding card debt.

The difference between advance payments and additional payments

You must remember that, unless you pay the outstanding balance on your card, you must still make a minimum payment so as not to fall into default. You must make this payment before your payment deadline to avoid the bank considering you in default. This is an additional payment. An early payment would be to pay your entire card before the payment deadline or even deposit more to have a positive credit balance.

For this reason, if you go from month to month with an outstanding balance to pay, it is better that you consider your contributions to your credit card made before your cut-off date as additional payments and not advance payments.

The best time to pay your credit card

The worst time is definitely when you start owing interest, that is, after your payment deadline. Not even making the minimum payment is one of the biggest mistakes you can make in the world of personal finance. The damage to your credit history of not paying even the minimum is quite serious.

(In this case, I am talking about the minimum to not fall into default, not the minimum to not generate interest.)

A great time to make payments to your credit card will always be before your payment deadline. The best time will be one or two weeks before your cut-off date.

Even paying a little more than the minimum is better than just paying the minimum. Remember that making these additional contributions to your credit card payments will help you maintain a good credit rating by lowering your credit utilization, that is, the percentage you use of your maximum credit limit.