US credit card debt increased by $45 billion in the 2nd quarter of 2023.
Credit cards are a useful financial tool if you pay the balance in full each month
The credit card due date determines when the cardholder will start incurring interest on the outstanding balance.
The Federal Reserve reports that US credit card debt increased by $45 billion in the 2nd quarter of 2023 and that total credit card debt is over $1 trillion. With more debt outstanding, household decisions regarding card use and payments have a growing financial impact on borrowers. This news provides an opportunity to discuss the best time to pay credit card debt to avoid fees and interest costs.
US credit card debt increased by $45 billion in the 2nd quarter of 2023
Why the Due Date Is So Important
When you know your card’s due date, you can work to avoid interest payments and late fees and avoid having late payments reported to credit bureaus.
The credit card due date determines when the cardholder will start incurring interest on the outstanding balance. When you receive the credit card statement, you typically have less than 30 days to pay the entire balance before interest is charged. Interest on a card balance is charged daily, meaning that you incur interest each day any balance is outstanding.
The card due date also determines when a payment is late, and you may be charged a late fee. In addition, the card company may report the late payment to credit bureaus, which can lower your credit score.
1. Pay Your Balance Early and in Full
Cardholders should strive to pay the entire card balance on time every month. You won’t be charged late fees when you pay on time, and no late payment data is reported to credit bureaus.
“When should I pay my credit card bill?” Remember that carrying a balance on a card with high-interest rates will generate more interest costs.
Forbes reports that the average credit card interest rate for the week of October 2, 2023 was a 28.06% annual percentage rate (APR). That rate translates to over 2.3% each month, and interest costs on a balance can accumulate quickly.
Interest costs are also impacted by the amount of credit card debt outstanding. Transunion, one of the credit reporting agencies, notes that the average debt per borrower is currently $5,972. As a simple example, a $6,000 card balance at a 28% APR generates $1,680 in interest a year.
When is the best time to pay your credit card? As discussed above, interest on a card balance is charged daily. The sooner you can pay off a balance that you’ve carried over from a prior month, the less interest you’ll pay.
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2. To Maximize Financial Return, Pay Later
Another card payment strategy is to pay your card balance later to maximize your return on the cash payment. In this case, the cardholder pays the entire balance on the due date but not earlier. To make an informed decision, consider the return you can earn before paying off the card balance.
Assume, for example, that your card balance is $5,000, and the payment is due in 25 days. Your plan is to sell a portion of an investment to pay the $5,000 balance, and the investment pays a 12% APR. To maximize your financial return, leave the $5,000 invested for another 20 days, sell the investment, and make the card payment.
If, on the other hand, the $5,000 is sitting in cash, earning a very low-interest rate, keeping the dollars invested another 20 days doesn’t generate much more return. You might immediately pay off the card balance to ensure you don’t miss the due date.
3. To Improve Credit Score, Pay Sooner
Consumers may also ask: “When should I pay my credit card bill to increase my credit score rankings?”
Your credit score is determined by several factors, including how much credit you use and how frequently you repay debt. When you make more frequent payments on your card, the average amount of credit you use declines. Using less credit improves your credit score.
The credit utilization rate is the amount of credit you use divided by the total available credit. A cardholder using $2,000 of $10,000 in available credit has a credit utilization rate of 20%. Many personal finance experts suggest that you should keep your credit utilization rate at 30% or lower.
Your credit utilization rate is calculated once a month. If you pay your card balance sooner (before the due date), the average amount of credit used is lower, and the utilization rate declines.
Making a large purchase may change your answer to the question: “How early should I pay my credit card bill?” If, for example, you use $9,000 of $10,000 in available credit and pay off the entire balance in five days, the impact on the credit utilization rate is much lower.
4. To Pay Less Interest on Debt, Pay ASAP
Cardholders have a grace period from the statement date (closing date) to the payment due date, and no interest is charged during the grace period. However, if you carry over a balance into a new month, the grace period on new purchases may no longer apply until the entire balance is paid in full.
Say, for example, that you carry over a card balance from March to April and make $1,500 in new purchases in April. There is no grace period for the $1,500 in April purchases, and you’ll also owe interest on the March balance.
As mentioned earlier, interest accrues daily, and the sooner you can pay the entire balance, the less interest costs you’ll incur. Paying off the entire balance may allow the card company to reinstate a grace period for new purchases.
Tips to Manage Credit Card Bills
Use these tips to manage your credit card usage, payments, and your credit report.
- Pay your balance in full: Pay in full each month and avoid carrying over a balance into a new month. This approach will minimize your interest costs and help to improve your credit rating.
- Monitor card transactions: Login, check your credit card activity frequently and contact the card company immediately if you see an unauthorized transaction. When you act quickly, it’s much easier for the card company to follow up and remove a fraudulent purchase.
- Understand the impact on your credit score: Before you make decisions about using additional credit or making a late payment, think about the potential impact on your credit score.
- Additional card payments: If you carry over a balance to a new month, the best time of the month to pay credit card debt is as soon as possible. With credit card interest rates over 20%, paying off the balance makes great financial sense.
- Set up automation payments: Automation can help you avoid missing a payment. Set up a monthly automated payment to pay your card balance. If you’re paid twice a month, consider setting up two payment dates based on your payroll deposits.
The Bottom Line
Credit cards are a useful financial tool if you pay the balance in full each month and keep your credit utilization rate low. However, high-interest rates and other fees can make carrying over a balance expensive and harmful to your credit score.
Consider other alternatives to eliminate your credit card debt. If you look into a debt consolidation loan, do your homework to find the best rate available.
Is it bad to pay only the minimum amount due on my credit card?
Paying only the minimum balance means that interest will be charged on the remaining balance. Also, you may lose the grace period for any new purchases until the entire balance is paid off. Accumulating a bigger card balance over time will generate even larger interest costs.
How does paying my credit card bill affect my credit score?
Consistently paying the full card balance each month improves your credit score over time, because you’re considered a more reliable user of credit. Paying only the minimum balance and increasing your card balance hurts your credit rating. Card companies may report both negative and positive information to credit bureaus.
Can I make multiple payments throughout the month on my credit card bill?
If you can afford it, you should make multiple payments during the month. This approach reduces the average amount of credit you use. The credit utilization rate will decrease, and your credit score will improve over time.