The most important date on your credit card bill is the due date. At a minimum, you always want to pay your minimum on time. Late payments can quickly snowball and come with some harsh consequences like late fees that can be more than your minimum payment. In addition, you could even see a higher penalty interest rate after 60 days of not paying. After 30 days, late payments can be reported to the credit bureaus and tarnish your credit score.
We all have plenty of incentives to pay our credit card bills on time. But what about paying it early?
Decrease Your Credit Utilization Ratio
Credit utilization ratio is one of the big factors that affects your credit score. It represents the amount of available credit you’re currently using. For example, if you have a credit card with a $10,000 limit and your balance is $5,000, your credit utilization is 50%.
Keeping your utilization balance below 30% is the common recommendation to keep your credit score intact. A high utilization ratio can signal that you have trouble managing your credit and can negatively affect your score.
The reason paying early helps with your utilization ratio is because credit card issuers do not always report your balance to credit bureaus on your due date. Often, they will report before your due date. So even if you’re really good about keeping your utilization down but wait until the due date to get it into the “good” zone, the credit bureaus may never know this.
Reduce Interest Charges
If you’re paying your credit card bill in full every month, then you’ll never need to worry about interest charges. Cards have an interest-free grace period until the next billing cycle, which gives you extra time to pay your balance in full.
However, if you’re not paying in full, you’re paying interest. Paying what you can as early as possible save you in interest because interest is calculated using your daily average balance during the billing period. Paying ahead of your due date automatically reduces your average daily balance for that cycle and reduces your interest charges.
Create More Space on Your Card
Aside from saving you money and increasing your credit score, paying early can help you out when the unexpected happens. When you pay early, you free up space on your credit card for other purchases. If your refrigerator goes out on you, it’s comforting to know you have the credit available to go grab a new one. The same goes for an expensive car repair. Ideally, you’ll have an emergency fund set up for life’s surprises, but few people do. Having some wiggle room with your credit is a good backup plan.
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