Credit cards are used to make purchases on credit. At the end of your billing cycle, you are required to settle all that you owe. However, what if you decide to be thoughtful or proactive and pay your credit card early? Does it mean you’ll be able to use it again? Or will you have to wait till your billing cycle ends to use it?
If you pay your credit card early, you’ll be able to use it again. Doing so can boost your credit score, reduce your balance that will be reported to the credit bureaus, and lessen your credit utilization.
Do you always wait till your billing cycle ends before you settle what you owe? If you do this because you aren’t sure if you’d be allowed to use your card again after paying your bills early, this article is for you. Below, I have not only answered this common question, but I have also provided a comprehensive guide about what credit cards are how they work, including their advantages and disadvantages.
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If you own a credit card, the chances are that you understand what it is, how it works, and the rules guarding its use. But, what about those who are new to the card? Of course, such people may have surface knowledge of this card, but such type of knowledge isn’t enough if you want to understand how this card works. So, to help, I have provided such individuals with a little definition of a credit card.
What is a Credit Card?
A credit card is a card issued to customers used to make purchases, with the agreement that the cardholder will ultimately repay the card issuer for the cost of the items bought, along with any agreed-upon fees and interest, should they be assessed.
Essentially, a credit card is similar to a loan that allows you to initiate purchases now and repay them (with interest) later.
A credit card, used prudently, is one of the most effective financial payment tools available to customers of all ages. You usually have a grace period between 21 and 30 days after the end of the billing cycle to repay any month without interest.
If you fail to pay what you owe, you may accrue interest depending on your card ( unless your card offers a 0% interest promotional rate for a period of time). In addition, credit cardholders will be charged interest on the amount borrowed and will be expected to make (at least) minimum monthly payments until the balance is settled.
How do Credit Cards work?
A debit card may appear like a credit card, but they aren’t the same. If you own a debit card, you shouldn’t assume that you know how a credit card works because they both look alike or are used to request cash and make payments. Credit cards offer users the ability to borrow, and that is why they boast of more users.
Here is a little summary of how these cards work.
Credit cards come with a max amount of money (commonly known as credit limit) which can be used over a specific period of time. That credit limit is largely determined by the credit cardholder’s credit scores and reports, which the credit card company will scrutinize before granting approval to the credit card applicant.
When using a credit card to purchase goods or services, the cardholder is authorizing the credit card company (American Express, Bank of America, Capital One, Barclays, Chase, Citi, Discover, etc.) to initiate the purchase on their behalf, with the promise to repay the exact amount at a later date.
Credit card companies will note the purchase, include it in the credit cardholder’s statement, and issue a bill at the end of the billing period tallying all the credit cardholder’s purchases, the amount of each purchase, and the overall amount owed on those purchases.
The card issuers will include an interest charge to any account balance that isn’t paid on or before the invoice due date. Added interest is a loss to cardholders, as that interest accumulates over time, as long as there is an unpaid balance.
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Benefits of a credit cards:
Credit cards offer several positive benefits to credit cardholders:
- Using Credit Cards can make it easier to monitor your spending
By using the credit card issuer’s site, you can easily check your online account to understand your recent card activity. Also, credit cards usually come with adequate fraud protection than a traditional checking account or debit card, reducing your liability if you are the victim of fraud.
- Card rewards are a plus
Many credit cards provide reward points and cash-backs. You can redeem these rewards for cash, gift cards, and even travel expenses. These points can be valuable if you don’t overspend to earn them.
- Convenience counts
Carrying a credit card is far more convenient than paying with cash or a check. In addition, tools such as mobile wallets allow you to merge your credit card to your smartphone or an application to make purchases.
- Credit cards can help build credit.
If you use your credit cards wisely by settling your bills early, ideally in full every month, you can help build your credit and enhance your credit score. If you carry a balance on your credit cards, by keeping your balance as low as possible (ideally less than 30% of your credit limit), you’ll keep your credit utilization low. Credit utilization is the amount of debt compared to your credit limit and is a huge factor in most credit scores.
- 0% interest rates, in some cases
Some credit cards have 0% interest on purchases or balance transfers for 12 to 18 months.
- A grace period
With credit cards, you essentially get an interest-free loan, or grace period, between 21 and 25 days. Any purchase made within your monthly cycle can be made interest-free until the payment due date (the next month). If you don’t pay your balance in full on or before the due date, you’ll owe interest on your average daily balance.
Disadvantages of Credit Cards:
Having looked at the advantages of a credit card, let’s briefly look at its disadvantages.
- Credit fees: One of the most important things to consider before using a credit card is the additional fees you may need to pay. Fees vary by credit card and may include:
- Annual fees
- Balance transfer fees
- Foreign transaction fees
- Late payment fees
- Over-the limit credit card fees
- High-Interest rates: another common disadvantage of using a credit card is that credit card accounts are some of the highest interest rate debts consumers can access.If you fail to pay what you owe in time, you could accumulate interest rates that could affect your finances and ability to settle what you owe.
When Is the Best Time to Pay Your Credit Card Bill?
At the very best, you should settle your credit card bill when it is due. But in some situations, you can do yourself a big favor by settling it even earlier (whenever your credit utilization gets close to or surpasses 30%). Here is why that is:
Why It May Be Worth Paying Your Credit Card Bill Early?
Your credit card bill’s due date indicates that a billing cycle has ended, and it is time to settle what you owe. However, the due date is not necessarily when your current balance will be reported to the credit bureaus. That is why it is essential that you settle your bill well before its due date.
To explain why let’s take a little step back and talk about how your credit utilization ratio affects your credit score. First, we’ll begin with a brief definition of credit utilization ratio.
The credit utilization ratio is the amount you owe in relation to your available credit. So, if you own a card with a $10,000 limit and your outstanding balance is $3,000, your credit utilization is 35%. Utilization heavily affects the portion of your credit score determined by the amounts owed.
Generally, the lower your utilization, the better. A ratio higher than 30% could reduce your credit score, so it’s crucial to stay below this threshold. This is where changing up your credit card payment due comes in.
Most credit card issuers report your balance to the necessary authorities on a particular day every month, and, as stated, that isn’t necessarily your due date. In the example highlighted above, say your payment is due on the 21st of each month, but your issuer reports your balance on the 15th. If your issuer reported a $35,000 balance on the 15th, the credit bureaus would see a 35% utilization ratio, even if you settled all of it in full just days later. So your credit score could still eventually get affected, even though your payment habits are commendable.
Therefore, a good thumb of rule is to make payment on your card whenever your credit utilization ratio starts increasing to that 30% mark, irrespective of when your bill is due. By keeping close tabs on your credit utilization and keeping it in check, you will be in good shape to get reported to the credit bureaus on any day of the month.
Can You Use Your Credit Card Again After Settling Bills Early?
Of course, if you pay your credit card in time, you can use it again. You can use a credit card whenever there is adequate credit available to complete a purchase. Your available credit reduces by the amount of any purchase you make and rises by the amount of any payment. So, paying your credit card bill early (and always) can help you avoid maxing out your spending limit and having a purchase get revoked. It will also reduce your credit utilization, which is good for your credit score. And it will save you a lot of money on interest. Let’s do a quick example.
Example:
Imagine your credit line is $2,000, and you buy a piece of furniture worth $1000. Your available credit reduces from $2000 to $1,000. You could make up to $1,000 more in purchases at this point. But that wouldn’t be the best idea because using more than 30% of your credit line can hurt your credit. That is where paying your bill early comes in. You have the right to initiate a credit card payment at any time. So if you were to settle the $1,000 you spent on the furniture, without spending any more, your available credit would return to $2,000.
Now, it is crucial to think about the schedule for credit card payments. Once your billing cycle ends, there is usually a grace period of 21 days or more until your due date, during which you can settle your purchases without attracting interest.
Of course, you are very much allowed to use your credit card during this grace period. Any purchase you make after your closing date is part of the next billing cycle, not the existing one. But if you fail to pay the complete balance listed on your statement, you will lose the grace period. That means you won’t get 21+ days between the close of your next billing cycle and your due date before the interest is activated. It will start compounding immediately.
In a nutshell, paying your credit card in time will let you use it again, provided you have little-to-no available credit to start with. It can also enhance your credit utilization. Just ensure that you remember to pay your complete statement balance by the due date; otherwise, you may attract interest charges.
