What Happens When You Pay Your Credit Card Debt Early?
One of the critical aspects of debt is the credit score. An improved credit score means that lenders trust you more, which translates to easier access to larger sums of money. Paying credit card debt on time ensures that your credit score is not negatively affected. What you may not know is that paying before the due date is even better. But first
1. Understand Your Billing Cycle
The law demands that the billing due date be constant each month, but most lenders use cycles, which may be between 28 and 31 days. This means that the due date cannot be the same every month because of variations in the number of days of the months. The cardholder agreement gives concise information on the billing cycles.
Your card’s closing statement is always out immediately after the billing date. Ensuring that monthly payments are made on time ensures that credit bureaus do not earmark you for delayed payments. The credit bureaus also note repeated extra remissions, an attribute that influences your credit score.
2. When Paying Extra is Beneficial
Note that even after making the additional payments the previous month, you will still be required to make the next billing cycle’s minimum payments.
3. The Utilization Percentage
An extra payment reduces the card balance, consequently lowering the card utilization percentage for that month, which improves your credit score. Additional remissions also ensure you pay lesser fees, mostly when the lender uses the adjusted balance method.
If you have a credit limit of $5000 and spend $1000, and the billing cycle ends on the 5th, with a report sent to the credit bureaus on the 6th of the same month, your utilization percentage for that month will be 20%. If you spend an added $2000 on the credit card, your utilization will shoot to 60%, which may affect your credit score.
Making an extra payment to pay the total credit of $3000 before your billing cycle ends on the 5th will benefit you. You can also choose to pay the entire $2000, which takes your utilization percentage back to 20%. Keeping the monthly utilization lower than 30% improves your credit score.
Based on this argument, it’s clear that paying your credit card debt before the due date improves your credit score. It’s even better when you make extra payments each cycle, but understanding your billing cycle is the most important thing. All factors considered, making the payments before the due date, is considered a good payment time.
Also, feel free to contact us for financial advice.