Paying your credit cards on time to avoid late fees and interest is a no-brainer. But you can also boost your credit score and reduce interest charges by paying your credit card bill even earlier, perhaps weekly, as its your daily balance that affects how they’re calculated. Here’s what to consider when deciding whether paying off your card weekly might be the right move for you.
Why paying early can save money
Credit scoring models like FICO and VantageScore give you a higher score if you use only a small portion of your available credit. This measurement of how much credit you use is known as credit utilization, which accounts for 30% of your total credit score. As a rule, the closer you are to 1% in total credit used, the better it is for your credit score (0% can indicate dormant, underused credit, which is why 1% credit utilization is considered ideal).
However, there’s a catch: your credit card bill’s due date only tells you that the billing cycle has ended, not necessarily when your current balance will be reported to the credit bureaus. As an example, let’s say you paid off a $3,100 balance on a $10,000 limit card for a due date that’s on the 30th of the month, but your card reports your credit utilization on the 15th: You’d be dinged for 31% credit utilization, even though you’re technically paying off your bill on time. On the other hand, if you paid off your credit card off weekly, your utilization ratio will always be relatively low.
Paying early also reduces interest
Paying early can also help you reduce interest if you’re carrying an outstanding balance every month, as the interest you’re charged with every billing cycle is based on your average daily balance.
As an example, for a card that charges 15% interest, a $500 lump sum payment against a $1,000 balance paid on the last day of your billing cycle would give you an average daily balance of $983, which works out to $12.29 in monthly interest. However, if you paid off the balance halfway through the billing cycle, the average daily balance would be $750, which ends up costing you $9.38 in interest.
Three bucks isn’t a lot, but it’s a monthly charge that you don’t have to pay if you can afford to make more frequent payments within the billing cycle. Plus, if you’re struggling to pay off debt, every dollar counts.