Understanding when and how to pay off your credit card along with the implications of doing so can be a bit of a minefield.
At the minimum, you should always aim to pay off your credit card in full every month. However, I’ve personally found it can be beneficial to pay the credit card off daily or weekly (depending on how often you use the card) to ensure that you’re keeping track of your spending.
It’s much easier to pay off $100 a week as you spend it on your credit card than it is $400 at the end of the month. However, there are more benefits than just peace of mind to paying off your credit card early.
How To Check Your Credit Card Balance
The easiest way to check your credit card balance is via online banking. All major online banks currently offer online banking.
Access to the account requires an internet connection and can often be done from a smartphone as well as a computer. Some banks even have dedicated apps where you can login using a passcode you’ve set (or using facial recognition or the fingerprint scanner with the latest smartphones)
If you don’t have access to online banking then you can ask your bank to send you paper statements in the mail. Although these are only likely to be sent once a month making it difficult to keep on top of your credit card bill – especially if you use the card a lot.
You could also find out your credit card balance by attending the issuing bank in person. While you can do this as much / as little as you like it will take a lot of time out of your day.
Finally, some banks offer a telephone service. You can call the operator who will be able to advise you of your current balance. Some of these numbers cost to call and may not be included as part of your phone contract so be sure to check this before calling.
Paying Off Your Credit Card Early Minimises Interest Charges
One of the many benefits to paying your credit card early is that it’ll reduce the amount of interest you’re charged.
When you carry a balance on your credit account, you’ll accumulate interest charges each day, based on your daily balance.
This benefit only applies to credit cards that charge interest. However, if you have a low credit score and have therefore only been able to get a credit card with a high-interest rate then the money you save by doing this can be substantial.
Let’s assume you have a credit card with 18% interest charges charged monthly and you make a purchase for $100 on the first day of the billing cycle.
If you pay the $100 off after one day then you’ll only pay $0.60 in interest (18% divided by 30 days of a month = 0.6 and 0.6 of $100 is $0.60)
If you pay the $100 off after seven days then you’ll only pay $4.20 in interest (18% divided by 30 days of a month x 7 days which is the total number of days you’ve had the credit = 4.20)
However, if you take the full 30-day billing cycle to pay back the $100 at 18% then you’ll be charged $18 in interest.
Early Credit Card Payments Can Improve Your Credit Score
Many people opt for a credit card as an introductory method to building a credit score for large purchases in the future.
There’s no doubt that using a credit card in the right way can significantly improve your credit score. Especially if you’ve no credit history or poor credit history. However, the key really is using this debt to demonstrate that you’re responsible to potential future lenders.
One way you can do that is by paying your credit card early.
One of the many ways lenders calculate your trustworthiness is through your credit utilization percentage. Credit utilization is the amount of credit you are using in relation to your total credit availability.
If you have $1,000 credit card available balance but you’ve only used $200 then you’re credit utilization is 20%
If you have a $1,000 credit card available balance and you have used all $1,000 then you’re credit utilization is 100%
There isn’t a set percentage that your credit utilization should or shouldn’t be and this is only one of the many factors that are considered when lenders decide whether to and how much credit to give you.
Experian, the largest credit score calculator found that those who often have more than 30% credit utilization will likely see their credit score decrease. I, therefore, recommend paying off your credit card early to minimize the possibility of this.
Right now nobody knows how often credit card companies report credit utilization to credit brokers. It could be once a day, or it could be once a month. This makes paying off large purchases quickly essential to keeping under the 30% credit utilization.
Why Paying Off Your Credit Card In Full Is Better Than Minimum Payments
Credit issuers require a minimum payment to be made every month towards your balance. This is either calculated as a fixed amount or as a percentage of your current balance.
However, by only paying the minimum balance instead of the entire balance you’re likely to;
Have a higher credit utilization percentage which will effect the likelyhood of you being able to get otherlines of credit and potentially decrease your credit score.
Mean that you incur interest charges (where applicable) calculating to a higher total cost than compared to paying the credit card off in full multiple times a month where possible.
While it may not always be possible to pay the credit card off in full. Making regular contributions to reduce the amount of credit utilization and interest you are charged is good both for your credit score and bottom line.
If you’re struggling to make payments on your credit card then be sure to start a budget and cut back on any unnecessary expenses. Pick up a second job to clear the balance quickly and effectively.
Alternatively, you could speak to a bank or licenced financial advisor about moving to a new card with lower interest charges if possible.