You charge up your usual monthly storm on your credit card. The statement arrives and your payment is due on the last day of the month, more than three weeks away. You get to thinking – you want to apply for a new card this month. If you pay your balance right away, will that help your credit score and make approval of that new card more likely? No.
You need to pay sooner, not later
Yes, I know. Darn it. It doesn’t matter if you pay early, if you make multiple payments or if you overpay. The way credit scores work is that credit card companies usually report your balances once a month, and it usually is at the end of the statement cycle, not the payment cycle.
Credit bureaus want to know the worst possible credit status you might be in, so that creditors can view you at your worst in order to minimize risk.
Thus, the way to actually impact your credit score is to pay off that balance before the statement closes. That means you’ll need to visit the website or call the credit card company to find out your balance, and then get a payment out and credited to your account before that date.
Mind your utilization rate
This is all tied to a part of your credit score called the utilization rate. This measures how much of your total available credit lines are being used. Generally speaking, the lower that percentage, the better it will be for your credit score. One rule of thumb to maximize your credit score is to use less than 30% of your credit limits in any given month, and even less than 10% will be more effective.
What if I boost my total credit?
You may now be wondering if you should apply for more credit so that the denominator of that credit utilization rate – the total credit available – will be larger. Therefore, your ratio will be smaller if you use the same amount of credit each month. The answer is yes, provided you don’t add to your debt load each month, thereby raising the numerator and the utilization rate. Of course, you should always make sure you have need for the credit and use it responsibly.
Aim to save on interest
The biggest reason to pay early, however, is related to accruing interest. If you carry a balance, then you are being assessed interest on a daily basis. Paying off anything from that balance, at any time, will save you money on interest. So even if it means paying $50 here, $35 there, and making multiple small payments each month, then do so as soon as you can afford to. The savings add up.
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