No one likes paying credit card interest. Fortunately, most credit cards have an in-built feature that cardholders can use to settle their balances interest-free: the grace period. Credit card interest rates can wreak havoc on your balance quickly than you can imagine. In order to ensure that you aren’t a victim of this charge, it’s best you pay your credit card at the right time. And that beg the question, when is the right time to pay credit card to avoid interest?
The best time to pay your credit card to avoid interest is on or before your due date. Anything after these dates can result in an interest rate and late penalty fees that could put extra burden on your finances.
It is essential that you pay your credit card bills to avoid punishments that can make life hard for you. If you are one of those individuals who aren’t sure of the right time to pay your bills to circumvent interest, this article is for you.
What Does Closing Date Mean on a Credit Card?
When Is the Best Time to Pay Credit Card to Avoid Interest
Before we go further, let’s look at what a credit card interest is, as knowing what it is will help you understand why you need to avoid it at all costs.
What Is a Credit Card Interest Rate?
A credit card’s interest rate is the price you pay for taking a loan. For credit cards, the interest rates are normally stated as a yearly rate. This is known as the annual percentage rate (APR). You can avoid paying interest on purchases on most cards if you pay your balance in full each month by the due date.
How Credit Card Interest Works?
If you carry a balance on your card, the card issuer will multiply it each day by a daily interest rate and include it to what you owe. The daily rate is your annual interest rate (the APR) divided by 365.
For instance, if your card has an APR of 16%, the daily rate would be 0.044%. If you had an unpaid balance of $500 on day one, you would accumulate $0.22 in interest that day, for a total of $500.22 on day two. It continues like that till the end of the month. If you had a balance of 4500 at the starting of the month and added no extra charges, you would end up with a balance of $506.60, plus interest.
What Is a Good Interest Rate for a Credit Card?
Credit card interest rates aren’t constant; they vary per card issuer. For this reason, it makes sense to shop around if you are looking for a new card. Typically, the better your credit, as represented by your credit score, the better the rate you’ll be qualified to get. That is because the credit card company will consider you to be less of a risk than an individual with a lower score.
In shopping for a credit card, knowing your credit score and the range into which it falls (like excellent, good, fair, or poor) can help you figure out which cards and what kinds of interest rates you might be qualified for before applying.
You can get your credit score for free at several websites and also from some credit card companies. Note that your credit reports, which you can also get free of charge at AnnualCreditReport.com don’t come with your credit score.
What Happens if You Use Your Credit Card on the Closing Date?
Factors That Determine Interest Rates:
Interest rates can come in different sizes, but for credit cards, they often fall into one of three categories: variable rate, fixed-rate, and promotional rate.
Most companies issue cards associated with revolving credit. Users of these cards are allowed to carry a balance on their accounts at the end of every billing cycle. Cardholders who carry a balance will see an interest charge added to their balance when their next bill arrives.
There are four common credit card companies, including Visa, MasterCard, American Express, and Discover. These companies charge interest rates based on several factors ( note that these factors vary per company).
Among the factors are:
Prevailing interest rates: Also regarded as “prime rates,” these provide the basis for most credit card rates. Prime rates were flat for many years but increased 0.25% in December 2015, and credit card interest rates increased with them. Cardholders paid roughly $192 million more each month in interest based on that little modification in the prime rate.
User’s credit history and card issuer’s risk evaluation: Credit card issuers will inspect your credit report and credit score to help them figure out the interest rate you will be charged. High credit scores mean lower interest rates and vice-versa.
Different rates apply: The general term for calculating interest is APR (or annual percentage rate), but a single card may have multiple APRs affixed to it. There could be different APRs applied to purchases, cash advances, balance transfers, including promotion rates. Some cards have ARPs that change after six months or a year. Most have variable APRs, but some are fixed.
Promotional Offers: Credit card issuers will lure customers with offers of zero-percent interest, sometimes for over a year. When the promotional period ends, rates are increased.
Payment history: If you are late with payments or decide not to pay, card issuers will raise your interest rates, sometimes dramatically.
The Best Time to Pay Credit Card to Escape Interest
Most credit cards offer an interest-free grace period of around 21 days, starting from the day your monthly statement is derived to the day your payment is due. But, if you don’t pay it during that period, an interest charge will go into effect, and you will end up with a balance that rolls over to the following month.
From the above, one can safely say that the best time to pay a credit card to avoid interest rate is before it is due. You can also decide to pay it when it is due. However, paying your credit card bills before their due date comes with some benefits. By making early payments, you can reduce the balance amount the card issuer reports to the credit bureaus. The result? A lower credit utilization. And as you probably know, lower credit utilization can improve your credit score.
Why It’s Important to Pay Your Bills on Time?
Most lenders adopt the FICO scoring model to evaluate credit scores. Under that scoring model, 35% of your credit score depends on your payment history. So if you have a record of making late credit card payments, that can damage your score.
There is another reason why you should make paying off your credit cards a priority. A credit card is a type of revolving credit account. Like installment credit accounts, like mortgages and student loans, revolving credit accounts allow you to take loans whenever you need them up to a particular threshold (your credit line). There is no fixed monthly payment, and you can carry a balance from month to month by deciding not to pay your bills completely.
Regarding your FICO credit score, revolving debt normally carries more weight than installment debt. So while making any loan payment after its due date can affect your credit score, a late credit card payment can as well do more damage to your credit.
The amount of debt you owe makes up 30% of your FICO credit score. An essential part of that variable is the credit utilization ratio (the amount of revolving credit you are using divided by the total amount of revolving credit you have available) linked with your revolving credit accounts. That means your credit score could take a nosedive if you miss your credit card payment deadlines and you have used a considerable part of your available credit line.
Is It Better to Pay Off One Credit Card or Reduce the Balances on Two for Credit Score?
The Case for Making Early Credit Card Payments
While it is a fantastic idea to settle your credit card bill when it is due, making an early credit card payment can work in your favor. To understand why you’ll need to know how your billing cycle works.
Credit card billing cycles always last for 29 to 31 days. The last day of your billing cycle is known as your statement closing date. Whatever credit card balance you have on this day is often the balance your credit card issuer reports to the credit bureaus. Your closing date isn’t similar to your payment due date. After all, your credit card payment technically isn’t due until the end of a 21 to 25 period, regarded as the grace period.
By making a credit card payment before the closing date, you can make it appear like you’ve accumulated less credit card debt. For example, let’s say you have a credit card with a $5,000 credit limit. If you spend $3,000 but pay off $2,000 before the closing date, the credit reporting bureaus will assume that you have only spent $1000.
Why is that a good thing? According to our example, the credit reporting bureaus would think that your credit utilization ratio is 26.7%. Reducing your credit utilization ratio can boost your credit score. If you want a better FICO score, consider keeping this percentage under 30%.
How to Use a Credit Card: The 3 Principles to Master
Here is an essential piece of advice to always remember: ensure that you handle your credit cards with extreme care. Unlike typical debit cards, you are making purchases on credit, meaning you are responsible for repaying everything you borrowed using the card. If you are careless, you can end up with a huge debt. I bet you know what that means to your finances.
There are some principles to becoming a credit card expert. If you take away anything from this guide, you should always adhere to the first rule: pay your bills early and completely every single month. This tactic alone will help your finances greatly. If you would like to learn other tips on using your credit card appropriately, read on for the best practices on managing your credit card.
First Rule: Always Pay Your Bill Early (And Completely)
The most crucial principle for using credit cards is always to pay your bills early and completely. Adhering to this simple principle can help you avoid interest charges, late fees, and poor credit scores.
By paying your bills in full, you’ll avoid interest and build toward a high credit score. You are usually offered several options to settle your credit card statement each month. While it may be tempting to pay just the minimum payment, which could be as low as $25, you’ll start to accumulate interest, resulting in years of debt. The best practice is to settle your credit card bill as soon as you make a purchase. This way, you can get into the habit of paying your bill long before the due date.
Every month, your credit card issuer will offer you your credit card statement with two dates: the closing date and payment date:
- The closing date is the last day you can make a charge for a monthly statement. After the closing date, any new transaction will be moved to the next month’s statement.
- The payment date informs you about when the payment for a certain statement is due.
All credit cards are different and will come with varying cycles of billing payment dates, including grace periods. Scrutinize the information for your credit card to understand how it works for your case. If you have issues remembering to pay your bill, most credit card issuers will allow you to set up automatic payments or schedule reminders every month.
Rule 2: Keep Your Balances Low by Only Charging What You Can Afford
Aside from making early payments, keeping your balance low relative to your available credit limit is essential. There are two primary benefits to maintaining a small balance:
- Low balances help raise your credit score
- You are more likely to settle your balance in full and early
Several factors determine your credit score, but a huge percentage comes from credit utilization, which is the ratio of what you owe to your total credit. For example, if you have a credit limit of $1,000 and charge $5,000 to your card, your credit utilization would be 50%.
Rule 3: Monitor Your Monthly Statement
Keeping close tables on your monthly statement helps check for fraud, stay on budget and maintain a low balance. Even if you are yet to set an automatic payment, it still makes sense to log in and check your statement each month to make sure that there are no strange transactions.
