Why Timing Your Credit Card Payment Matters

Q: I have a Discover card that is used for mostly all household expenses. I have had this card since 1985 and have been paying on time and I have an agreed status with the card, meaning ‘paid as agreed.

‘I normally pay off the full balance on the Discover card after the statement cycle runs, but weeks before the payment due date.

From a credit score perspective, is it better to pay off the full balance before the statement cycle ends, so that the credit card balance that gets reported to the credit bureaus reflects a zero balance?

Should I pay my credit card balance in full before the statement cycle ends?

A: The answer to that question is, yes, it is better to pay off your credit cards before the statement cycle ends, because you are absolutely correct that that zero balance is what will ultimately get reported to the credit bureaus. And as you likely know, 30 percent of your credit score is based on something called your “credit utilization rate,” meaning how much credit card debt have you charged versus how much credit you have available.

The majority of major credit card companies in the U.S., Discover card included I believe, reports whatever balance is shown on your statement. They report that to the three main credit bureaus: Equifax, Experian and TransUnion.

Key differences between the Big 3 credit bureaus

They also report to my understanding on the statement date. So, if your statement date was say, the 15th of the month, whatever is shown in terms of a remaining balance on that date, on the 15th, that’s what will be reported by the credit card issuer and on that statement date.

Recognize, however, that it takes some time for the bureaus — TransUnion, Equifax and Experian — to update the information. It is usually around two weeks, sometimes it can be less, about one week or so. But for the purposes of illustration, let’s say that your statement date is the 15th and your due date for your payment is actually say, the 10th of the following month.

Well, you certainly don’t want to wait until that date, the 10th or even a couple of days before there if you are trying maximize your credit scoring. You know someone is going to pull your credit reports and generate a credit score. You always want to try to pay before the statement date, the cut-off date, because again that’s the date at which the information will be reported to the credit bureaus.

This is the case for the majority of credit card companies. For other credit card issuers and some smaller credit card issuers, they might report on a different cycle, some might report on a specific date each month and still others might report on the last day of the month.

Conventional wisdom though is that you want to keep those credit card balances as low as possible on the majority of your cards, in fact try to keep it at zero whenever possible, and that’s what will be reported to the credit bureau and that’s what will maximize your credit score.

If you have multiple cards however, keep in mind this little tip. While you want to keep those balances zeroed out, if that’s at all possible, you should of course go ahead and pay off those credit cards in full, but it’s a good thing in terms of the FICO credit scoring model to have one card that does in fact show a balance. Just make sure that that balance is very low, less than 10 percent of your card’s limit.

So, for example, if the card has $1000 limit, you want the balance shown on any given month to be less than $100. For many of you, you might just charge something nominal, maybe a gas tank full of gas or something that’s $30 or $40, and that you can allow to remain on your credit even after the statement date has run its course and has a cut-off, but then of course go ahead and pay off the bill before the due date.

Frequently Asked Questions

Do I really need a credit card? 

Whether or not you really need a credit card is a question that often arises when considering personal finances. The importance of having a credit card varies depending on individual financial habits, goals, and circumstances. This credit card essay aims to explore the factors involved in making this decision.

Should I cut up my credit card after I pay it off?

Whether or not you should cut up your credit card after paying it off is a personal decision that depends on your financial goals, spending habits, and level of self-discipline. Here are some factors to consider:

  1. Temptation and Self-Control: If you have a tendency to overspend or if the availability of credit tempts you to make unnecessary purchases, it may be wise to cut up your credit card. Removing the physical card can help eliminate the temptation and prevent you from falling back into debt.
  2. Emergency Fund: Before cutting up your credit card, ensure that you have established an emergency fund. Having savings set aside for unexpected expenses can provide a financial safety net in case of emergencies. If you don’t have an emergency fund, you might want to keep the card for such situations but exercise caution in its use.
  3. Credit History and Score: Consider the impact cutting up your credit card may have on your credit history and credit score. If the card has a long credit history or contributes significantly to your credit utilization ratio (the amount of credit you’re using compared to your total available credit), closing the account might have a temporary negative impact on your credit score. However, if you have other active credit accounts and maintain good credit practices, the impact may be minimal.
  4. Fees and Benefits: Assess whether your credit card carries annual fees or provides valuable benefits such as rewards, cashback, or travel perks. If the card offers significant benefits that outweigh the costs, it might be worth keeping it open and using it sparingly.

Ultimately, cutting up your credit card is a symbolic action that can help you break free from the cycle of debt and promote responsible financial habits. However, it’s important to evaluate your individual circumstances and consider the potential impact on your credit history and financial goals. If you decide to cut up your credit card, remember to inform the card issuer and formally close the account to avoid any potential fraudulent activity or fees.

It’s recommended to consult with a financial advisor or credit counselor who can provide personalized guidance based on your specific situation.

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