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What you need to know about paying your credit card early – Forbes | Gmx Pharm

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Paying your credit card bill on time is a crucial step in good financial health. In fact, your history of making timely payments on your credit card — or not — accounts for 35% of your credit score. As long as you make your monthly payment in the billing cycle by the due date, you remain in good standing with your loan provider. However, there are a few reasons why you should consider paying early. Read on to find out more.

Find the best credit cards for 2022

No single credit card is the best option for every family, every purchase, or every budget. We’ve selected the best credit cards to be most helpful to a wide variety of readers.

Benefits of paying your bill early

Reduce interest costs

If you pay your card balance in full by the statement due date, you will not have to pay any interest. However, if you choose to hold a balance on your card, this is known as a revolving balance and is charged as interest. Most credit cards calculate your interest charges using the average daily balance method, which means your interest is compounded and accumulated daily based on a daily rate. This means that each day your financing costs are based on the previous day’s balance.

If you make a payment before the due date of your billing period, this reduces the balance owed by the amount of your payment from the day it is posted, and in turn reduces the total amount used to calculate your interest daily for the remainder of the period the month.

Increase available credit

Every credit card has a maximum credit limit, which is the total limit that you can charge your card. The maximum available balance on your credit card is usually based on a combination of the issuer’s policy and your creditworthiness. Those with excellent credit are likely to get higher credit limits on a card than those who are just starting out on a loan.

Let’s say your credit card’s maximum limit is $2,500 and you currently have a balance of $750. If you wanted to buy a couch for $1,850, you would have to pay back at least part of your balance to pay for your couch with your credit card. This early payment allows you to increase the available balance on that particular card in that billing cycle.

You might also consider reducing the amount of debt you owe when you buy a mortgage. Mortgage lenders typically prefer a debt-to-income (DTI) ratio that is the total amount of debt you carry compared to the amount of money you bring in of less than 43%. Your DTI helps lenders evaluate your ability to repay a loan and affects the interest rates you receive. By paying early, you reduce your DTI ratio and could improve your eligibility for a better interest rate on a mortgage.

Improve your credit score

A key factor in determining your credit score is your debt-to-credit ratio, which accounts for 30% of your FICO score. Also known as credit utilization, this number is the percentage of your available credit that is being used versus your total available credit. While owing money doesn’t mean you can’t pay, the closer you get to your credit limit, the lower your credit score will be.

If your credit card has a $4,500 line of credit with a $550 balance and you owe a total of $3,000 on an auto loan, your debt-to-credit ratio is 47.3%. If you want to increase your score as quickly as possible, paying early can help. If you were to cash out the entire balance on your credit card, you would reduce your quota to 40%.

According to the Consumer Financial Protection Bureau, it’s recommended to keep your debt-to-credit ratio at no more than 30%. While paying early won’t put you in the recommended range if you’re over the 30% mark, your issuer will report a $0 balance when your statement is released, rather than the previous $550 balance. This complete reduction in credit utilization can have a positive impact on your credit score.

When you apply for a loan, even a few points increase can mean the difference between good and fair credit.

Other ways to increase your bottom line

Paying off your credit card bill early isn’t the only way to improve your debt-to-available-credit ratio, and ultimately your credit profile. Here are some best practices to keep your credit in good shape.

The goal is to pay in full

If you’re able to pay your credit card bill in full and on time each month, this behavior will save you a significant amount in interest over the life of your card. Remember that when using a rewards credit card, the interest you pay on a balance you carry far exceeds the value of the rewards earned.

Make payments on time

There is a common myth that in order to build your bankroll you need to have a bankroll. Ultimately, whether you pay your bill early or in full each month is up to you, but making at least the minimum payment on time is the best thing you can do when it comes to maintaining or building your credit score. Your card provider reports on-time payments to the top three credit bureaus, Experian, TransUnion, and Equifax, and this behavior accounts for 35% of your score.

Plan ahead and keep the balance low

There may be times when you need to carry a balance. But generally, do your best to only charge for what you’ve budgeted for. In an emergency, you will have sufficient credit to cover unexpected costs.

You’ll also want to keep track of your debt-to-income ratio and your overall credit utilization to make sure you qualify for the best terms when you need to apply for a loan.

Keep your oldest card open

On-time payments and debt-to-credit ratio account for 65% of your credit score. But the next category up, accounting for 15% of your score, is credit history length. By simply keeping your oldest credit card active and in good standing, you can maintain a longstanding credit history that can positively impact your credit score.

If your oldest card has an annual fee and you’re not actively using the card, you should contact your card provider to see if you can switch to a no-annual option.

Earn the right credit card rewards for you

Credit card welcome bonuses are meant to be enticing. And while the rewards on offer can be beneficial, some cards may be incentives that may not work for you. Before applying for a new card, be sure to read the full terms and conditions. Earning miles on an airline card is unlikely to be beneficial if, for example, you fly infrequently.

Knowing your spending habits can also help you determine the best card for your needs. Often the welcome bonus is the most enticing part of the offer, but when the card offers high rewards for dining out if you mainly cook at home, this may not be the best choice for you in the long run.

Find the best credit cards for 2022

No single credit card is the best option for every family, every purchase, or every budget. We’ve selected the best credit cards to be most helpful to a wide variety of readers.

bottom line

If you’re looking to improve your credit score, paying off your credit card bill early can help temporarily. But good credit isn’t built with short-term fixes. Making payments on time and keeping your balances under your maximum limits will go a long way in helping you build a solid credit history over time.

Updated: September 17, 2022 — 12:32 am

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