When & How To Pay A Credit Card: A Complete Guide
You probably already know you should pay your credit card bill on time every month.
But is there a benefit to paying it off early?
Is it ever a good idea to have a credit card balance?
Here's a guide to understanding your credit card statement, along with when and how you should pay your bill.
How to pay a credit card in 7 steps
Most people don't look forward to getting their credit card statement in the mail—or an alert in their inbox.
But ignoring your credit card debt can damage your credit score and harm your long-term financial health.
Credit card debt can feel overwhelming, but tackling it step by step can help you pay it down, or even pay off your bill entirely.
Here's how to do it.
Make more than the minimum payment
First, you should always strive to make more than the minimum payment.
The minimum payment might be a good deal for the credit card company, but it's a bad deal for you because minimum payments mainly go toward interest, with very little chipping away at the principal.
For example, if you make the minimum payment of $125 per month on a $5,000 credit card with 18% interest, you'll pay $6,923 in interest, and it'll take you over 22 years to do it.
But if you pay $300 per month, you'll pay off your debt in just 20 months, and you'll only pay $797 in interest. That's a savings of $6,126.
There might be times when you have to make a minimum payment here or there, but doing the math shows why you shouldn't make a habit of it.
Focus on the card with the highest interest rate
If you have more than one credit card, try to pay off the card with the highest interest rate to start.
For example, if one card charges you a 15% annual percentage rate (APR), and the other card has an 11% APR, you want to go after the 15% card first, as those few extra percentage points can make a big difference in how much you pay over time.
If you're truly burdened by credit card debt, and you're struggling to keep up with multiple monthly payments, you can also try the "snowball" method of paying off credit card debt.
You do this by picking the card with the lowest balance and using an aggressive repayment strategy while focusing on paying off the balance as quickly as you can. This might mean making minimum payments on your other cards, but you'll only need to do this for a short time until you pay off the lowest card.
Once you've paid off the balance on your lowest card, move on to the next one. This way, you pick up momentum as you go, snowballing your way toward a debt-free lifestyle.
Negotiate with the credit card company
Many people don't realize that it's possible to get a lower interest rate simply by asking for one. This strategy doesn't work all the time, but it's worth a shot.
If you've been with your credit card company for a long time, they might be willing to reduce your interest rate if you explain that you're struggling with debt and would like to regain control.
This strategy can be especially effective if you've never been late on a payment, and you've spent many years faithfully paying your bill. The credit card company might be willing to give you a temporary reduction in interest, which can help you pay down your balance more quickly.
Don't close your credit card accounts
In some cases, people try to take charge of their debt by cutting up their cards and closing their account. Their intentions are good, but they don't realize they are sabotaging their credit score.
When you close a credit card account, you reduce your available credit, which can hurt your credit utilization rate—the amount of your available credit compared to how much credit you're using. Because credit utilization makes up 30 percent of your credit score, reducing your available credit can drag down your score significantly.
Remember, having credit cards isn't a bad thing. In fact, having available credit helps boost your credit score.
Instead of shutting down your accounts, focus on paying down your balances and maintaining a good credit utilization rate—no more than 30 percent—on each card.
Consider a credit card balance transfer
If you're stuck with a credit card with a high interest rate, it might be a good idea to move your balance to a card with a more favorable rate.
Many credit card companies offer cards specifically designed for balance transfers, and most of them come with a low or 0% APR. This can cut your interest drastically, making it easier for you to pay off your balance.
The catch, however, is that the 0% interest rate doesn't last forever. In many cases, these introductory rates expire after 12 months, although you might find a card with one that extends through 18 months or more.
If you're disciplined, and you know you can pay off your credit card debt before your 0% APR expires, a credit card balance transfer can be a smart way to reduce your debt.
However, you should research thoroughly before moving your balance. Make sure you know how long the introductory interest rate lasts, what kind of transfer fees are involved, and if there are any limits on how much money you can move.
Take charge of your spending habits
Your commitment to paying your credit card bill will be a lot more effective if you make an effort to understand your spending habits. Many people pay their bills and make everyday purchases without truly knowing how much money is going out the door each day.
You can get a firm handle on your spending habits by simply writing down everything you buy (including bills you pay) over the course of a month. If this is too intimidating, start with tracking your spending for one week and go from there. You can find several useful, free apps that let you track your spending on the go by recording purchases on your phone.
Once you see exactly how much that daily coffee, or your afternoon trip to the vending machine, is costing you, you can adjust your habits accordingly—and enjoy the savings.
For example, packing a lunch instead of spending $10 each day will save you $50 per week. If you do that every week, you'll have an extra $200 you can put toward your credit card bill.
Make a monthly budget
The final step in your credit card repayment strategy is to make a monthly budget—and then stick to it. If you've been tracking your spending, you'll already know how much you pay out each month.
From there, make a list of all your bills, along with their due dates. If you struggle to keep track of due dates, consider setting alerts on your phone, or enrolling in autopay with your bank or creditors. Once you get the hang of it, budgeting can be rewarding, and even fun.
How to read and review your credit card statement
Your credit card statement might not be the most stimulating thing you read, but it's not something you should skim or ignore. Instead, pay careful attention to each section, including the payment due date, new balance information, and minimum payment requirement.
Payment due date
The payment due date is straightforward—it's the day by which you need to make at least a minimum payment toward your balance. If you don't, your credit card company will charge a late fee.
If enough time goes by, they'll also report your late payment to the credit bureaus, which will hurt your credit score.
Your new balance includes the items you've charged within the most recent billing period. Most credit card companies provide a lot of detail in this section of the statement, including the name of the retailer, how much you spent, and the date you made the purchase.
When you get your statement each month, carefully review the new balance section. Check each purchase to make sure it's accurate, as well as legitimate. If you see a fraudulent charge or anything suspicious, contact your credit card company right away.
The minimum payment is the amount you need to pay each month to maintain your account in good standing. Each credit card company calculates the minimum payment differently, but it's typically a percentage of your total balance.
As explained above, making the minimum payment benefits the credit card company, but it doesn't help you—or your wallet.
As you charge more and accumulate more debt, you can expect your minimum payment to increase. Over time, this can create out of control credit card debt, which can put you in a perilous financial situation.
Paying off your credit card in full
If you can, you should aim to pay your credit card bill in full each month. If you can't manage that, you should create a repayment plan that minimizes the amount of interest you'll pay over time.
To illustrate why minimum payments are such a bad deal for consumers, let's look at an example.
Say you've got a $3,000 credit card balance on a credit card with 11% interest. Assuming your minimum payment is $57, you'll pay $2,319 in interest, and it will take you a little over 17 years to pay off your debt. In that time, you're almost doubling the original amount charged.
Using the same figures, if you pay a fixed payment of $100 a month, you'll pay $524 in interest over 36 months. Bump that monthly payment up to $250, and you end up with $242 in interest in less than a year and a half. That's $2,077 in your pocket.
As you can see, there is a big difference between making the minimum payment versus paying off your debt as quickly as you can. This is why it's important to do the math each month when you review your credit card statement.
When to pay your credit card bill
A good rule of thumb is to make your credit card payment by the due date each month, which keeps your account in good standing and protects your credit score.
But you might actually boost your score by paying your bill before the due date, because your payment due date might actually fall after the date your credit card company reports your card balance to the credit bureaus.
For example, assume your credit card has a $5,000 limit. If your balance is $2,000, you're using 40 percent of your available credit, which puts you above the ideal 30 percent credit utilization rate.
Instead of waiting for your card's due date, you might want to pay early to bring your balance down to the 30 percent credit utilization range. To do this, you'd need to pay at least $500, which would put your credit utilization at 30 percent.
Unfortunately, there are no hard and fast rules for when credit card companies report cardholders' balances to the credit bureaus.
Reporting practices vary among different creditors, so it's almost impossible to know when your credit card company will do its reporting.
But you can stay on top of your credit utilization rate by making an early payment any time your rate starts to inch north of the 30 percent threshold.
How do credit card payments work?
To take control of your credit card debt, you need to know more than just your payment due date and minimum payment amount.
It's not hard to understand a credit card statement, but there are a few nuances when it comes to how credit card payments work.
Credit card billing cycle
Your credit card billing cycle is simply the length of time between monthly billings. Billing cycles can vary among credit card companies, with a range running anywhere between 27 and 31 days.
Balances carry over from the previous billing cycle, with your most recent purchases included in the "new balance" section of your current statement. This is why you might have to go back a statement to track down a particular purchase.
What does statement balance mean?
Your statement balance is what you owe for that particular billing cycle. You'll typically see this amount at the top of your credit card bill.
This is the amount you must pay by the payment due date to avoid paying interest.
What is an outstanding balance?
Your outstanding balance is what you owe on any specific day. You can think of your statement balance as a static thing; the purchases on the statement won't change.
By contrast, your outstanding balance can be different from one day to the next.
For example, if you're on vacation and charge $200 worth of souvenirs to your credit card, your outstanding balance will show these charges if you log in to your account and check your balance in real time.
If you charge $100 for dinner the next day, your outstanding balance will now show a $300 balance ($200 in souvenirs plus the $100 restaurant bill).
What is the grace period on credit cards?
A grace period gives you a window of time to pay your credit card bill without incurring any interest.
Credit cards vary, but most grace periods begin on the first day of the billing cycle and end anywhere between 21 and 25 days later.
Credit card companies aren't required to offer grace periods. If they do, however, the Credit CARD Act of 2009 requires them to make their grace period at least 21 days.
If you time it right, you can use your card's grace period to your advantage.
For example, let's say you charge something to your credit card on the 20th, and your card's billing cycle ends on the 25th. Your card also has a 21-day grace period, which begins on the 25th. This gives you three weeks to pay your balance without paying any interest. You can think of it like a three-week, interest-free loan from your credit card company.
You can find out how long your card's grace period is by reviewing your cardholder agreement. Keep in mind that some credit cards don't offer a grace period at all. For example, you probably won't see a grace period on a balance transfer card.
It's also important to be aware that grace periods are only available if you pay off your balance in full each month.
If you make a payment on time, but don't pay off your total debt, the credit card company will begin charging interest on your balance—and that interest will continue to accrue from billing cycle to billing cycle, with no grace period in between.
It may be possible to get your grace period reinstated, but your credit card company might require you to pay off your full balance each month for a few months in a row.
This is yet another reason why paying your full bill each month is better than carrying a balance.
What does available credit mean?
Your available credit is how much your credit card company will let you spend, less any balance you're currently carrying.
For example, if you have a card with a $50,000 limit, and your balance is $2,000, your available credit is $48,000.
How paying off your balances helps your credit score
If you can, you should make it a goal to pay off your credit card balance in full each month. There are a couple reasons why doing so can help your credit score.
Build a positive payment history
First, your payment history makes up 35 percent of your credit score. By paying your bill consistently and on time every month, you show creditors and potential creditors that you're responsible and can be counted on to honor your obligations.
But it's important to keep track of what you charge to your card.
Unlike a debit card, a credit card doesn't let you see money leave your account as you spend, which can put you in danger of overspending.
To avoid this, make a budget each month, and only charge as much as you can afford to pay off with each billing cycle. This lets you build a positive payment history and raise your credit score without paying any interest on your purchases.
Improve your credit utilization
And there's another reason why it's best to pay off your balances every month.
As discussed above, your credit utilization accounts for 30 percent of your credit score. If you carry a high balance on your credit card, you could easily shrink your amount of available credit.
If you can't afford to pay off your credit card bill each month, you should still pay as much as you can toward your debt. The idea is to get your credit utilization at or below 30 percent. For example, if your credit card has a $5,000 limit, you want to keep your balance at or below $1,500.
If you see your credit utilization rate approaching 30 percent or higher, you might want to consider making more than one payment per month or requesting a credit line increase.
Because you have no control over when the credit card company reports your balance to the credit bureaus, sending payment twice a month can keep your balance low, which helps your credit utilization. You can also make a payment immediately after you charge a large purchase.
Credit cards can give you a great deal of financial freedom—but it's important to use them responsibly.
You can do this by staying on top of your statements, making more than the minimum payment, always paying your bill on time, and avoiding the pitfalls of overspending.
About the Author
Mike is a recognized credit expert and founder of Credit Takeoff. His credit advice has been featured in Investopedia, CreditCards.com, Bankrate, Huffpost, The Simple Dollar, Reader's Digest, LendingTree, and Quickbooks. Read more.