Is it best to pay off credit cards in full

Debunking the myths: 7 facts about credit cards

Does paying less than the minimum count as a missed payment? Should you avoid having a high credit limit? Knowing the facts can help you make smart choices.

Now that you have a good handle on the basic facts about credit cards—as well as the most common misconceptions—you have the tools to better manage your credit and build a strong credit history. If you’re considering a credit card, learn more about Bank of America’s credit card options.

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When a credit card company sends a bill, the cardholder usually has a little less than a month to pay back what’s owed before incurring any interest. Paying a bill right away (or at least as soon as possible) might seem like the most responsible thing to do, but this doesn’t always hold true, and choosing when to pay—as with most decisions about credit cards—depends on your financial situation.

Which strategy is right for you?

Find The Best Credit Cards For 2022

No single credit card is the best option for every family, every purchase or every budget. We've picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.

Rule #1: Pay in Full, on Time

Before proceeding any further, there is actually one simple answer that’s true for all credit card users, no matter the circumstance: Pay in full, on time. Contrary to an enduring myth, carrying credit card debt past the end of the billing period is not good for credit scores—it’s usually the opposite. Paying what’s owed and being consistent about it are two of the most important factors on a favorable credit report.

Carrying a balance from month to month is often costly. The only real benefit is the capital that’s been temporarily extended to the cardholder. With interest rates commonly exceeding 15%, credit cards are an inefficient way to borrow money for longer than a month or two. As such, the first step in timing payments should be simply ensuring that bills stay small enough to be paid reliably.

Ensuring bills remain reasonable is easier said than done and the numbers prove it— the average U.S. adult with a credit card carries an ongoing balance of over $5,500. Even for responsible people, “Rule #1” can devolve into simply meeting a mandatory minimum to avoid penalty fees. Luckily, any credit card user, no matter their credit score or level of debt, can still adjust the timing of payments to help a financial situation.

To Maximize Financial Return, Pay Later

Many Americans do pay off bills in full and many keep monthly spending well below the recommended credit utilization threshold of 30%. People who do these two things reliably are more likely to have a favorable credit score. These routinely-responsible cardholders don’t benefit much from rushing to pay off monthly bills.

Instead, late-cycle-payers can likely afford to take full advantage of the credit extended to them each month. Of course, the bill total will stay the same throughout a billing period, but cardholders can benefit from the “time value of money” extended to the amount owed. This value comes from the concept that there is value in simply holding a sum of money over time, based on its potential to earn.

Up until the time cardholders actually pay the bill, credit card users can still earn interest on the money owed. Whether that money would otherwise be invested somewhere or held in a checking account, the additional interest this would garner can add up to a significant sum over months and years. So, for cardholders unburdened by debt or a waning credit score, waiting to pay until close to the end of a billing cycle will almost certainly increase overall wealth, if just by a little at a time.

To Improve Credit Score, Pay Sooner

Credit card users may have noticed already that exceeding 30% of a monthly credit limit can hurt a credit score. Less well-known, however, is another way to influence that percentage, known as “credit utilization.” This adds a different type of value—one that goes beyond money spent or saved.

Credit card companies report a cardholder’s balance to credit bureaus every month, but this doesn’t necessarily coincide with the end of a billing period. Keep in mind that every time a cardholder pays off a balance in full, the credit utilization ratio temporarily drops to zero percent. So no matter how much they spend in a month, if a cardholder happens to pay a bill just before a balance is reported, the credit utilization on the account looks very low. In that case, the part of their credit score that’s determined by “amounts owed”—an important category to the report—will be calculated favorably. This has the potential to significantly improve a credit score.

But without knowing exactly when your balance is reported to credit bureaus, what’s there to do? A common strategy for those focused on improving their credit score is to simply pay off the credit card bill quickly with the expectation that doing so is more likely to precede reporting than if the payment was stalled.

It’s also possible to pay off the balance anytime credit utilization nears 30%, even if that means paying several times within a billing period. Along with close monitoring of one’s credit utilization, this might require some financial stability and might be impossible for people who find themselves waiting on the next paycheck in order to afford paying down a credit card bill.

Paying at the last moment, of course, offers cardholders the highest degree of flexibility with their money and may still be the only practical option if cash is tight. Most credit card companies allow cardholders to adjust the dates of their billing period so the due date for bills could be made to fall immediately after a recurring payday. For some, this increases flexibility and helps maintain low credit utilization at the same time, even when living paycheck to paycheck. Depending on which bank or institution issues the card, adjusting billing period dates can be as simple as logging into an online account or calling customer service.

To Pay Less Interest on Debt, Pay ASAP

Credit card users who always follow Rule #1 need never worry about paying interest. But for those carrying a balance, it’s important to know how the amount of interest owed is determined. Each month, credit card companies take an average of the balance owed by a cardholder on each day of the billing period. This is known as an “average daily balance.” This number is applied to the cardholder’s specific interest rate.

Out of convenience, cardholders in debt sometimes wait until the due date of their next bill to finish paying off the previous month’s balance. This means that for every day the payee might have had the money to pay even part of that bill off they were still on record as owing the full value of their balance. If instead they paid off their balance halfway through the billing period, their average daily balance for that period would drop by half. If halfway through the period they were able to pay off, say, only a quarter of their debt, they could still reduce their average daily balance by over 12%. Any amount paid down at any time during the period can reduce the daily average balance.

For example, for a cardholder who has a $1,000 balance, let’s assume that they paid off $500 of their balance at the end of the billing cycle. This cardholder’s average daily balance would be over $1,000 ($1,000 plus interest charges) for each day of the billing cycle. Compare this to a cardholder who pays off $500 in the middle of the billing cycle—who’s average daily balance will be over $1,000 only for half of the billing cycle, and then around $500 thereafter. The second cardholder would pay less in interest over the course of a month. Depending on the balance and the interest rate, the savings could be significant.

Rather than deciding to pay at the beginning or the end of their billing period, cardholders in debt should simply keep working away at what they owe as they can, knowing that it’s not just the total paid off at the end of the month that matters, but the timing, too.

Find The Best Credit Cards For 2022

No single credit card is the best option for every family, every purchase or every budget. We've picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.

Bottom Line

Pay credit card bills in full, on time every time. When payments are made within the billing cycle can be optimized to maximize return on the credit or to help improve a credit score. To make the most of the money borrowed, leave the money in an interest-earning bank account longer and pay bills just before interest would begin to accrue. To keep credit utilization rates low and bump a credit score up, pay as early as possible. But, never forget: never carry a balance if it can be avoided.

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