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Pay your credit card bill before it's due

Should you pay your credit card bill before the company's deadline? There are several benefits to this early bird approach to money management.

By Dough Roller May 12, 2014 5:14PM

This post comes from Rob Berber at partner site the Dough Roller.

The Dough Roller on MSN MoneySome folks have trouble paying their credit cards on time. Paying them early seems completely out of the question. Yet that's exactly what a listener to the Dough Roller Money Podcast does.

Credit card © CorbisSteve writes:  

I have a money tip for credit cards. Let me know what you think.  About six months ago, I started paying the amount due as soon as I received the bill. This way, I only have one month’s worth of expenses on my card at any time, rather than the two months’ [worth] I used to have when I paid it on the due date. This keeps my utilization rate low, which we know affects credit scores.

Do you think this makes enough difference to affect one’s credit score? All I know is that mine is at an all-time high and broke 800 for the first time.

Let’s examine Steve’s tip.

First, the utilization rate Steve refers to is the outstanding balance on revolving debt such as credit cards divided by the total credit limit. For instance, if you have just one credit card with a total limit of $10,000 and you’re carrying a $5,000 balance, your credit utilization rate is 50 percent ($5,000 divided by $10,000).

FICO calculates credit utilization in two ways. It determines utilization for each individual credit card or line of credit. It also calculates an overall credit utilization. Both are important factors in your FICO score.

In a recent interview, FICO's credit expert, Tom Quinn, says that the most important thing for your credit is paying your bills on time. But the second most important thing is credit utilization. He recommends that consumers keep credit utilization below 30 percent. 

If you have $10,000 of available credit, you don’t want your balances to go over $3,000. And the lower your utilization rate, the better. Below 30 percent is fine, but 20 percent is even better, and 10 percent is even better than that.

Here’s why. If you’re maxed out on your credit cards you'll have a more difficult time dealing with a financial emergency. If something goes wrong with your finances, you don’t have a lot of available credit to deal with it, and you’re basically living life on the edge, financially speaking.

But why pay early?

But let’s get back to the original tip. Why does paying off your credit card bill the day you receive it versus the day it’s due help? For credit utilization purposes, the credit bureaus take a snapshot of your credit each month. Whenever they take that snapshot, you may have a balance on your credit card. Even if you pay the card in full each time the bill is due, you may still have a balance on the day they take that credit “snapshot.” Wherever your credit utilization is at that time, that’s what the credit bureau will record into your file for that month – even if you pay off your card in full the very next day.

If you consistently pay off your bill as soon as you receive it, your balance will remain lower. If, on the other hand, you continue to charge up the card between receiving your bill and paying it off on the due date a couple of weeks later, your reported balance will be higher. This increases the chances that when the credit bureau takes the snapshot, your credit utilization will be higher.

Budgeting with your credit card
There is a side benefit to Steve’s tip. Paying off your credit card early can help you budget. When you swipe that credit card, the money doesn’t come out of your bank account immediately. If you’re looking at your bank account balance to decide how much you have left to spend, you may be deceived if you don’t factor in that credit card spending.

Steve's tip helps you track your credit card spending on a monthly cycle.  To take this a step further, you can make multiple credit card payments throughout the month. It's easy to make these payments online.  Multiple payments reduce your checking account balance throughout the month to reflect actual spending. 

More from the Dough Roller

May 12, 2014 7:49PM

Hey Fox....what's a Benghazi?

By the way FOX, DOW hit record high today....

I wonder if Fox and Friends will mention it tomorrow morning.

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