Contributing Writer at Tally
December 14, 2020
Credit cards offer plenty of benefits, including building credit, helping in a financial pinch and offering reward points and cash back. Many credit cards also offer other perks like rental car insurance and zero fraud liability.
A chief part of making these perks worthwhile is avoiding interest charges. You can avoid these charges by paying your balance in full each month. Still, you might be wondering when to pay your credit card balance and whether paying your credit card bill early (or even making multiple payments) can help.
We’ll address these topics, but first let’s review the fundamentals of a credit card statement so you start on the right financial foot.
Your credit card statement is full of dollars and percentages. Some of these figures play an active role in determining when to pay your credit card balance and how much to pay. They can also help you determine if it’s a good idea to pay off your full credit card balance. Here’s what you need to know:
Your payment due date is one of the most important elements of your credit card statement. If you fail to make at least the minimum credit card payment by the due date, the credit card issuer may report the late payment to the credit bureaus, which could lead to a negative mark on your credit report and lower FICO credit score.
Your payment due date is generally 20-25 days after your statement closing date, which is when your billing cycle ends. The 20-25 days between your statement closing date and due date is also called the interest grace period. During this grace period, your credit card issuer won’t apply any interest charges to your account.
Your statement balance, which some credit card companies call the “new balance,” is the total balance on your credit card at the end of the billing period.
If you log in to your credit card account online or through the mobile app, you may find a more generic "current balance" listed. This is your total credit card balance, which includes your statement balance and any charges that'll apply to your next statement.
Your minimum payment due is the least amount you can pay on the credit card to remain in good standing with the credit card issuer.
Credit card issuers calculate their minimum monthly payments in various ways. Some calculate them by a fixed percentage of the balance, like 3% to 5%. Others use the total interest charges accrued that billing period plus a smaller fixed percentage of the statement balance, like interest accrued plus 1% of the statement balance.
Some credit cards offer special promotions, such as a low interest rate (or no interest) for specific purchases or a balance transfer promotion. In this case, your credit card statement will have a section named "Promotional Purchases" or something similar.
Here, you'll find several bits of important information, including:
Balance remaining on the promotional interest rate
Date you used the promotion
Promotion's expiration date
Promotion details such as deferred interest if paid in full or 0% interest for 12 months
Amount of deferred interest, if applicable
Initial promotional purchase amount
It’s essential to know the details of any promotions (including the terms and how long it will last) as your regular interest rate will go into effect once the specified period is over.
The goal of paying your credit card balance in full each month is to avoid paying any interest. Credit cards calculate interest based on your average daily balance, but they don't immediately apply it every day.
Instead, most credit cards offer an interest grace period between the statement closing date and your payment due date. During this grace period, the credit card company won't apply the interest charges to your account.
If you pay off your entire statement balance within the grace period, you'll avoid all interest payments. What's more, if you're using a rewards credit card, you'll still receive all your cash back and rewards.
As such, the best time to pay your entire credit card balance is during the grace period. But there are some exceptions to this rule.
Paying off your entire credit card balance is beneficial in most cases, but there are some instances when it's not.
When credit cards offer 0% APR balance transfer, you pay no interest for a fixed term, generally 6-18 months. However, you’ll pay a balance transfer fee, which is usually 3% to 5%. For instance, if you transfer $2,000 to a 0% APR balance transfer card, you'll pay a $60-$100 balance transfer fee.
To make the most of the 0% APR offer and spread out that balance transfer fee, calculate a payment schedule that results in you paying off the entire balance at the end of the promotion term rather than all upfront.
If you transferred $2,000 to a 0% balance transfer card with a 5% transfer fee and an 18-month promotional term, you'd want to pay off the $2,100 balance (transferred balance + balance transfer fee) over the full 18 months. To meet this goal, you'd only pay $116.67 each month and incur no interest fees.
Some credit card companies offer a promotional APR if you make purchases of a minimum dollar amount. There are two main types of these promotions: deferred interest and 0% promotional APR. For example, 0% APR for six months on purchases over $600.
Deferred interest means the credit card company continues to calculate interest on your purchases throughout the promotional period, but it won’t apply the interest charges to your account. If you pay off the balance within the promotional period, you pay no interest. However, if you have a balance remaining after the promotional period ends, the credit card company will add the deferred interest amount to your credit card's outstanding balance.
Credit cards with 0% promotional APR don't defer interest. Instead, they waive all interest charges on purchases for a fixed promotional period. If you pay the balance in full within the promotional period, you pay no interest charges. However, if you have a remaining balance after the promotion expires, you'll pay the standard credit card interest rate on the remaining balance. Unlike deferred interest, 0% promotional APR credit cards don't apply interest charges retroactively.
Like a 0% balance transfer promotion, take full advantage of the 0% or deferred interest by calculating how much you must pay each month to pay off the balance by the end of the promotion. For example, if you receive six months deferred interest on a $600 purchase, you could pay $100 per month to spread out your payments and make it easier on your budget.
Credit card companies calculate daily interest charges based on your average daily balance. Paying off your entire credit card bill early will save you on the daily interest. However, if you plan to pay off your total statement balance within the grace period, you’ll pay no interest charges either way.
That said, paying off your credit card early can help prevent temporary credit score decreases. For instance, if your credit card balance remains until your statement closing date, your credit card company could report that full balance to the credit bureau before you can pay it off. If you carry a high monthly balance relative to your credit limit, you risk pushing your credit utilization ratio over 30%, causing your credit score to drop.
If you pay your credit card balance before the statement closing date, you'll avoid this issue.
In some cases, paying off your entire balance in one large chunk doesn’t fit your financial situation. Perhaps you have a tight budget and it’s challenging to have one bigger payment at the end of the month.
In this situation, making multiple smaller payments throughout the month that total your monthly charges may work. You can determine your smaller payment amounts by dividing the amount you plan to charge on your credit card during the billing cycle and divide that by the number of pay periods during the billing cycle.
For example, if you get paid weekly and plan to charge $2,000 per month on your credit card during a 28-day billing cycle, you’d want to commit $500 from each paycheck to your credit card.
This can help you better manage your budget, but it also requires careful planning and calculations to ensure you pay off your entire balance by the payment due date.
Paying off your credit card balances in full every month is a great way to leverage a credit card’s benefits — including the reward points and cash back — without making interest payments. However, it’s critical to know when to pay your credit card balance to avoid those interest charges.
If your only concern is saving money on interest, paying your credit card balance within the grace period will do the trick. But if you're also concerned about possible credit score decreases due to the credit card company reporting a high balance, you may want to pay the balance before the statement closing date.
If it’s difficult to make one large payment each month, making multiple smaller payments throughout the month may work for you. As long as your smaller payments pay off all your charges within that billing cycle before the grace period ends, you’ll pay no interest charges.