Paying a Credit Card Early: What You Need to Know

Paying a Credit Card Early: What You Need to Know

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Paying your credit card balance before its statement closes can lower your interest payments and increase your credit score. This is because paying early leads to lower credit utilization and a lower average daily balance. In this guide, we’ll give you an in-depth look into the best time of the month to pay your credit card bill and show you why paying early can benefit your finances.

When Is The Best Time to Pay Your Credit Card Bill?

At a minimum, you should pay your credit card bill before its statement due date. Paying a credit card after this due date can result in hefty late fees and, depending on the credit card, an increased interest rate. Most banks charge somewhere between $25-$35 per late payment, so these fees can add up quickly.

Paying your credit card late can have a negative effect on your credit score, too.

Roughly 35% of your credit score is based on your bill payment history, so even one late payment can drop your credit score significantly if it’s reported to a credit bureau. While banks are free to report any tardiness, in practice they most frequently report only those that are late by more than 60 days.

You can never pay your credit card too early, but be sure to check the statement period to which your early payment will be credited.

For example, if your statement closes on June 30th and you make a payment on June 29th, if you pay less than the full balance due, your payment will be credited to the previous statement. In this case, you will still need to make at least the minimum payment towards your June 30th statement.

What Happens If You Pay Your Credit Card Early?

The benefits of paying your bill in the middle of the statement period include freeing up your line of credit and helping reduce the amount of interest you may pay. We go over each of these advantages in more detail in this section.

How Paying a Credit Card Before The Statement Closes Affects Interest

Paying your credit card bill in full before the statement closes means you shouldn’t have to pay any interest, unless you have been paying down a balance over several months. Most credit card issuers give you a grace period during which you’re not liable for paying interest, provided you pay your account in-full before the statement due date. If you pay your balance before the statement closes, you’ll see a “payments” line on your statement, reflecting the amount that’s been subtracted from your statement balance.

However, if you make a final balance payment early in a billing cycle, you may be surprised to find that you still owe interest in your next payment billing cycle.

“Residual” or “trailing” interest charges happen when interest is charged between the time when your statement is issued and when you pay your bill. Most credit card companies calculate interest payments based on the average daily balance of your credit card.

When you pay your credit card before the statement closes, that average daily balance will be lower, bringing your monthly interest charge down with it.

Finally, assuming you continue to use your card for the rest of the month, paying the balance before the statement closes will reduce the minimum payment that’s due at the end of the statement. However, banks calculate the minimum payment that’s due in a range of ways, so check out our minimum payment guide for information specific to your bank.

How Paying Your Credit Card Early Affects Your Credit Score

Paying your credit card early can improve your credit score, especially after a major purchase. This is because 30% of your credit score is based on your credit utilization. In short, credit utilization is how much credit you’re using in relation to your total credit line. For example, if have a $1,000 credit line with a $450 balance, your credit utilization is 45%.

Credit card issuers generally report account balances to credit bureaus on or around when your account statement closes. If you have a high balance on your card, your credit card issuer will report high credit utilization. This is generally seen as a negative factor by credit agencies, so your credit score may drop accordingly.

To counter this, a lower balance will be reported to credit agencies if you pay part or all of your balance before your statement closes. Since that prepayment will lower your credit utilization, which is a positive, the move will generally result in an increase to your credit score. Check out our credit utilization guide for more information.

There’s no magic number for how much credit you should be utilizing. However, we’ve found that credit scores start to decrease when people use more than 30%-40% of their credit limit, so try to stay under this proportion.

If you frequently exceed this utilization, you may want to ask your credit card issuer for an increased credit line or spread your spending across multiple cards. Some people claim that keeping a small unpaid balance on your card at the end of every month is beneficial to your credit score, but this is not true.

Paying Your Credit Card Early Frees Up Your Credit Line For Purchases

Lastly, paying your credit card bill early frees up credit on your account. When you make a credit card payment, the amount of your payment is automatically added back to your credit line, which can be especially useful helpful if you’re getting close to maxing out your credit limit.

It’s extremely important to stay under your credit limit. If you’re at or over your credit limit, future purchases on your card may be declined. This can be embarrassing or even disastrous if you find yourself needing an emergency car repair, or in some other financial emergency.

Your bank doesn’t like it when you run out of credit either. Some banks charge over-limit fees when you charge beyond your credit limit, while others may decrease your credit limit or even close your account at-will. These are fairly unusual consequences, however, and few banks will impose them. Even if they are used, it shouldn’t be a surprise to you, since Credit CARD Act of 2009 requires cardholders to opt in to the use of over-limit fees on a card account.

Joe Resendiz

Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.

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