If you're a fiscally-savvy person, then you are well-versed in taking the proper steps needed to stay on top of your money. These measures often include: budgeting, cutting unnecessary costs, and paying bills on time.
Credit cards can be a valuable tool in maintaining financial stability -- if you pay off their balances every month. But if you are paying your credit card bill before the due date every month, is that actually too late?
The answer depends on what your objectives are. If your goal is simply to avoid late fees, keep annual percentage rates low, and maintain a zero balance on your credit cards, then paying your credit card bill before the due date is just fine. However, if you are trying to maximize your credit score, then paying your credit card bill on time is indeed too late.
Before explaining why, let's review the basics of a credit score. It's a three-digit figure which quantifies your creditworthiness to potential lenders and creditors. One of the biggest factors in computing this score is your credit utilization rate, which is the amount of outstanding credit card debt divided by your credit limit. So in theory, if you always carry a zero balance, your credit utilization rate would be a perfect zero percent.
But here's the thing: credit card companies report your outstanding balances to the credit bureaus on the account's statement date, not its due date. So let's say your credit card statement dated July 1 shows an outstanding balance of $1,200, and the due date to avoid penalty charges is July 15. If you pay your bill in full on July 10, you won't incur a late fee; but the credit card company has already reported the $1,200 balance to the three major credit card bureaus back on the statement date of July 1. Therefore, your credit score is computed using that $1,200 figure, not the $0 which results after you pay your bill "on time."
So how can you maintain a zero balance in the eyes of the credit bureaus? Pay off your credit card charges before the statement date, not the due date. In the above example, if you made a $1,200 payment to the credit card company that was posted on June 29, the company would tell the credit bureaus that you have a zero balance -- and that would boost your credit score. (Option 2: if you do pay your bill after the statement date, you could refrain from making charges on the credit card for one billing cycle. Then the credit bureaus would be informed of your zero balance on the next statement date.)
Again, this incongruity in recorded balances isn't important if you're only worried about paying off the balances on your credit cards in order to avoid carrying a balance and/or falling behind on payments. Indeed, the fact that you don't have any credit card accounts in arrears is going to reflect well on your creditworthiness anyway.
But if you are trying to boost your credit score as high as it can go -- perhaps because you're planning on applying for a mortgage, car loan, or credit card in the near future and you want to qualify for the best rates -- then you'll have to adjust your credit card payment schedule. In practice, that means you need to check your balance online a few days to a week before the statement date, pay the outstanding balance, and then don't make any more charges on the card until after the statement date. Only then will the credit bureaus be made aware of your zero-balance status -- and reward you accordingly with a higher credit score.
