What's the best time to pay your credit card bill?
It is common for some people to pay their full card balance by the due date on their monthly statements. The rest will make smaller payments throughout the month, while others will keep a balance while making the minimum required payment.
So which is the optimal method?
Well it comes down to your financial goals, whether that be maintaining cash flow, or increasing your credit score.
Before we get into specifics, let’s first review important terms and why you should pay your bill by the deadline.
Credit cards operate on a monthly billing cycle, and there are three dates to understand:
The statement date.
Each month, your card issuer generates a statement for you based on all of the activity within a period, usually a month. Statement dates, or closing dates, occur on this day. After this date, everything that happens - even before your statement arrives - will appear on your next statement.
Statement balances will appear on your statement when it is produced. It is calculated by adding all new charges made during the billing cycle to the balance at the beginning of the billing cycle and subtracting any payments made during the billing cycle.
The due date.
You are required to pay at least the minimum amount by this date. In most cases, the due date is about three weeks after the statement date. Credit scores may be lowered if you fail to pay on time.
The reporting date.
Your card issuer reports your balance to the credit bureaus on this date. You will not see the reporting date on your bill, unlike the closing date and due date. It could be any time during the month, but it's best to assume it will be around the time of your statement closing date.
Credit Utilization Ratio
This is the percentage of your total credit limit you’ve used. For most, a healthy ratio would be below 30%. To be clear this doesn’t mean you should maintain this.
For Example, if you have a $1000 limit on your credit card, and have a balance of $300, then your credit utilization ratio is 30%.
Most lenders use the FICO scoring model to assess credit scores.
Under this scoring model, a whopping 35% of your credit score is based on your payment history. Therefore making sure you make the minimum payment by the due date is essential. Especially because FICO weighs credit card debt or revolving debt more heavily than other forms.
In Fact if you have a history of making late payments, it would be wise to add an automatic monthly payment towards your credit card.
While paying your credit card bill on time is a good idea, paying it early can actually benefit you. Understanding your billing cycle will help you understand why.
It usually takes 29 to 31 days for a credit card to be billed. Usually, the closing date of your statement is the last day of the billing cycle. This is the last day your credit card balance is reported to credit bureaus. The grace period for credit card payments lasts for 21 to 25 days, so you don't have to pay immediately.
If you pay off your credit card before its closing date, it will appear that you have accumulated less debt. Consider a credit card with a limit of $3,000, for instance. The credit bureaus will think you've only spent $800 if you spend $2,500 but pay off $1,700 before the closing date.
What are the benefits of that? Credit reporting bureaus would consider your credit utilization ratio as 26.7% based on our example. A lower credit utilization ratio can improve your credit score. Keeping this percentage below 30% will help you improve your FICO score.
90% of the time it’s smarter to pay your credit card ahead of the due date than the day of. With that being said there are 3 reasons why you would choose to do so.
Firstly, making one lump payment helps with cash flow. As the age old saying goes, cash is king, and maintaining consistent cash flow for a business is essential.
Another reason is the convenience, when you make your payment on the due date there’s no worry. You simply open your banking app, check the amount owed, and transfer the funds.
Last but not least, it simplifies your bookkeeping. On your statement date you get an amount due, which is your expenses, and when you make a single payment you get your total cash outflow.
It’s safe to say that this section does not apply to those with poor credit, or those looking to improve their credit score.
You’ll be in good shape if you can pay off your credit card by the due date, especially if you pay your entire balance. Paying at least part of your bill before the closing date could be even better if you want a good credit score.
But the best time to make a credit card payment may be whenever your credit utilization ratio exceeds 30%. By tracking your credit utilization ratio and keeping it as low as possible, you can protect your credit score. And you won’t have to worry about remembering the date when your credit information will be reported.
To calculate the credit utilization ratio for an individual credit card, you can take your credit card balance and divide that number by your credit line. Then multiply that number by 100.
Credit reporting bureaus also consider your overall credit utilization ratio. If you have multiple credit accounts, that’s equal to the sum of all of your credit card balances divided by your total credit limit.
To help you manage your credit card bill, keep an eye on your credit utilization and make a payment when it reaches too high levels:
In order to avoid paying interest and late fees, you must pay your credit card bill by the due date to avoid paying late fees and interest. However, if you wish to improve your credit score, you should probably pay before the closing date of your statement, whenever your debt-to-credit ratio begins to climb.