What Happens if I Pay My Credit Card Early?
For many things in life, the earlier, the better — but does that also go for paying your credit card?
January 25, 2022
It can be challenging enough to have the cash needed to pay off your credit card balance at all each month without worrying about early payments.
But if you’re fortunate enough to find yourself in a position where you can pay before the billing cycle ends, you might be wondering what happens if you pay your credit card early. Is it worth it? Is the outcome good, bad or neutral?
To answer these questions, we’ll need to examine a few concepts. Let’s break down what paying your credit card early means, the advantages of doing so and how it compares to simply making your payments on time.
What does it mean to pay your credit card early?
Every credit card has a billing cycle that runs from the date your last statement ended to the day your current statement will end. After the end of the billing cycle, you’ll receive your latest statement and your payment due date, which is the final day you need to pay your credit card balance to avoid late fees or interest charges.
The time between the closing of your billing cycle and the payment due date is called the grace period. Usually, a grace period lasts about 21 days.
When we refer to “early” payments, we’re talking about payments made before the closing date of the billing cycle. The key to early payments is understanding when these dates fall and how to use them to your advantage.
How to make early payments
The practicalities of making an early payment are simple enough. It’s up to you to decide when you make your credit card payments, whether you make the payments manually each time or enable automatic payments from your bank account.
There’s also no restriction saying that you can only make one payment per month. You can even make multiple small payments throughout your billing cycle rather than paying everything in one large chunk.
What are the benefits of paying your credit card early?
Late payments signal to lenders that you’re an unreliable borrower — that’s easy enough to understand. But it can seem more perplexing to get your head around why paying your credit card early would be necessary, provided you’re always paying on time and doing everything else right.
There are three benefits: It can boost your credit score, make it easier to pay off your debt and reduce your bill through less interest. Let’s look at these advantages in more detail.
Credit score improvements
Paying your credit card bill early can improve two of the most important FICO credit-scoring factors: payment history and amounts owed.
When it comes to payment history, potential lenders want to see that you make a habit of paying your bills on time. When you pay your credit card bill early, you don’t run the risk of missing the due date and being late with your payment. This will have a positive effect on your score.
The second factor that can be improved through paying early is the amounts owed category. This is because paying your credit card early can lower your credit utilization ratio, which is the proportion of your available credit that you’re actually using each month.
For example, you might have a credit card with a credit limit of $2,000 and a second card with a limit of $3,000. This means your total credit available is $5,000. If you carry a balance of $2,000 on both cards, you’ll be using $4,000 of the $5,000 at your disposal — that’s a credit utilization ratio of 75%.
If you only use a small portion of what you can access, it’s a signal that you’re less likely to be heavily reliant on credit and therefore more likely to make your minimum payments each month.
But how does paying your credit card early lower your credit utilization ratio?
It’s not until the statement closing date at the end of your billing cycle that credit card issuers send information about your outstanding balance to the credit bureaus. So, if you pay some or all of your credit card balance before then, that portion of the balance won’t show on your credit report.
In the example above, in which you’re using $4,000 of your $5,000 available credit, let’s say that you pay one of your credit card balances off before the end of the cycle, meaning you have a $2,000 balance on one card and $0 on the other. Once your statement closes, your credit utilization ratio will be at 40%.
Easier to pay off debt
Improving your credit score is a technical reason you should consider, but there’s also a personal motivation for paying your credit card early if you can. It makes it easier for you to organize and keep on top of your payments.
If you wait until the end of the billing cycle and find that your statement balance is thousands of dollars, it can seem daunting or even impossible to pay it all off. But paying off chunks of a few hundred dollars throughout the month can seem much more achievable.
If you get paid every week, it can be particularly useful to time your credit card payments to align with your paychecks.
Lower interest charges
In some cases, paying part of your balance early could even reduce your bill at the end of the month by lowering your interest charges. The impact of this effect depends on if your credit card company uses the average daily balance method or the adjusted balance method to calculate your interest charges.
The average daily balance method calculates your average credit card bill across every day in your billing cycle. Having a few days with a lower balance, because you made an early payment, will help to lower this average a little.
However, the adjusted balance method calculates your bill based on your balance when the billing cycle ends, so you’ll accrue a significantly lower interest charge by having a lower balance at the end of the period.
Either way, you can end up with lower interest charges if you pay your bill early.
Take advantage of this payment hack today
By paying your credit card early, you can avoid late fees and end up with a lower credit utilization ratio. Early payments can be helpful for cardholders who need a few extra credit score points to secure better loan terms in the future.
If you’re struggling to make your payments each month, one way to improve the situation is to use an app to help you automate the process and organize things on your behalf. Tally† is a credit card repayment app that can manage your credit card payments for you, and it can potentially take your higher-interest credit card debt and consolidate it into a lower-interest line of credit.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.