4/28/2014 3:00 PM ET|
A better way to pay off your credit card
Knowing the details of your credit agreement and payment options can make bill-paying easier -- and maybe cheaper.
First, a few questions:
Do you know your credit card’s closing date?
Do you know your card’s minimum payment due?
Have you heard about the “grace period” for your credit card payments?
If you answered “no” to any of the above questions, this story’s for you. (Even if you answered “yes,” it’s a good refresher.) And if you do have debt to pay down, or are looking to improve your credit score, we have helpful tips for you, too.
First, there are several different dates and numbers you should keep in mind when it comes to managing those little pieces of plastic in your wallet. We’ll tell you what you need to pay attention to:
1. Know your billing period
Each month, a new billing period will start on your credit card, but not typically on the first on the month. Let’s say your credit card has a billing period that begins on the 25th of one month and ends the 24th day of the next month. Any transactions that post during this 25th-to-24th timeframe will be reflected on your bill for that month.
2. Understand your closing date
Your credit card statement closing date wraps up your bill for that month—any transaction posted after the closing date will go on your next statement. Your card’s closing date can be located on your monthly statement.
Let’s take the same example above of the card with a billing period of the 25th to the 24th. The closing date for that card is the 24th day of the month—the last day of the billing cycle. The balance on the card as of that date is the one that’s reported to the credit bureaus and reflected in your credit reports.
Your credit card utilization rate is also reported at this time. We’ll talk more about that in a minute.
3. Don’t forget your payment due date
Most credit card issuers will send you reminders to pay your bill so you won’t miss your payment due date. You can also use LearnVest’s Money Center or Credit Karma’s account monitoring to set up reminders. If you miss a credit card payment or make a late payment, it can damage your credit score and cost you in interest charges.
But wait, there’s more: In our ongoing example, the payment due date is on the 21st of the following month (the month after the closing date). So, if your billing period is Oct. 25 through Nov. 24, and the closing date is November 24, the due date for that billing period isn’t until Dec. 21.
That means you have some time to pay off your statement balance in full before any interest is charged to it. This time is called the grace period and, in this case, it starts on November 24 (the closing date) and ends on December 21 (the payment due date).
Aside from making your payment on time each month, here are some other things to keep in mind when it comes to paying your bill:
- Pay the full statement balance to avoid interest charges. You’re only required to pay the minimum before your due date. But if you make a habit of that, you’ll end up paying interest charges. While this step won’t necessarily do anything for your credit score, it could do a lot for your wallet.
- If you can’t pay the statement balance, at least meet the minimum payment. Your credit card statement will list a “minimum payment due.” That’s not a suggestion – in order to avoid being considered late on your payment, always aim to pay at least this much toward your bill before the due date.
- Don’t necessarily pay your credit card by the closing date. You may think you’re helping your credit score by paying off your credit card way before the closing date or making several payments before your due date to get down to a “0” balance, but that’s not necessarily the case. Your credit score only cares that you pay on time. An exception here is if you’re working to reduce your credit card utilization rate before it’s reported on your credit. (We’ll get to that next.)
Controlling your credit utilization rate
This is the average amount of your credit limits you’re using, expressed in a percentage. In general, the lower your credit utilization rate, the better it is for your credit score since it makes up about 30 percent of your FICO score, the most widely used scoring model. Most credit experts advise keeping your balances to less than 30 percent.
Your credit utilization rate is reported to the bureaus on your statement closing date. If you’ve racked up charges that equal more than 30 percent of your limit, you may want to make a small payment before your closing date to reduce your utilization rate.
This is especially helpful if you rack up a bunch of charges on a low-limit credit card: For example, if you charge $400 in a month on a card with a $600 limit. Unless you make a payment before your closing date, your credit utilization rate reported on that card would be 66 percent—well above the recommended 30 percent. In that case, you might want to pay down your bill prior to your closing date. By reducing your credit utliization rate, you can improve your credit score.
Putting it all together
At this point, we’ve thrown around a lot of dates and terminology. Let’s wrap things up by looking at a chart of the illustration we’ve used throughout this explanation, based on a November billing cycle.
|What is it?||When does it occur?||Why is it important?|
|Billing period||10/25-11/24||Any transactions posted during this period will contribute to the closing balance and be reflected on your upcoming credit card bill.|
|Statement closing date||11/24||The last date on which transactions can post for the current billing cycle. This is also typically when your lender reports your balance to the credit bureaus.|
|Payment due date||12/21||You have to pay at least your minimum payment due for the previous billing cycle by this date.|
|Grace period||11/24 – 12/21||This is the period of time you have to pay off the full statement balance without accruing interest.|
The bottom line
This seems complicated, but it doesn’t have to be. So long as you keep your credit card balances to less than 30 percent of your credit limits and make all of your bill payments on time, your credit score will thank you.
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1. The minimum payment is not a goal, it is "the minimum" payment you can make to stay in the good graces of your credit card company. You SHOULD pay it off, or as much as you possibly can, each month - that will eliminate or reduce your balance owed;
2. Many people ARE aware of the "grace period", however they tend to use it as the target date to submit their "minimum" payments (bad mentality to live by);
3. Like so many others have already posted, don't charge more than you can afford to pay off in a short period of time;
4. If you have a high interest rate, call the credit card company and ask for a lower rate. In many cases, they will reduce it. However, if you are habitually late with your payments, don't expect to get a lower rate; and,
5. Credit cards should be used when you need to - i.e., an emergency type situation - NOT for when/what you want. If you WANT, save for it. By the time you have saved enough to buy it, you may find out what so many people find out after charging something - it wasn't so important after all!! You need to practice this last to halt impulsive and compulsive spending.
There is a HUGE benefit to practicing these principles, appreciation and satisfaction for what you worked hard to save and purchase. The choice is yours if you want to remain a "victim" of credit card companies' policies; or, you can choose to be a "survivor" of credit card debt by practicing better credit usage.
Credit card companies are only interested in keeping you paying as much interest as possible as long as possible. They play all sorts of games to do so. My personal favorite? Pay them late, and they immediately impose the "penalty" rate, which can be as high as 29.99 per cent. It's happened to me. Oh, by the way, when I say late, I don't mean weeks or months. I once made a payment 3 days after it was due. With the very next statement, my rate was tripled.
Oh, by the way, for all those who insist you should only charge things if you can afford to pay the balance in full immediately, I'd say this. When you're unemployed for long periods of time, which isn't unusual these days, you often have a choice. Use a credit card to keep the heat or electricity on, or sit in a cold dark home. What would you do?
Chase Bank is awful like this. I'm about ready to cut the card and say bye-bye to them.
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