Credit Card Payments – How Much, When and Why?

When it comes to making payments on your credit cards there can be a lot of questions. Is it OK to just make the minimum payment? Should you pay it off every month? Is there a better time during the month to make a payment? How and when you make your credit card payments can have a significant impact on your credit score.

Let’s start with making minimum payments. While payment amounts are not factored into the scoring models there are several reasons to always try to make more than the minimum payment amount on your credit cards. The first reason is that you will pay off the card faster and avoid heavy monthly interest charges. Also more and more lenders are looking at the patterns of paying off credit card debt. More and more credit cards are reporting not only the minimum payment required that month, but they are also reporting the minimum payment that you paid the month before. So if you are making only minimum payments, some lenders are looking at this and asking “why?” Even if you have a good credit score, their thinking is that if you are making only minimum payments this could make you more of a credit risk. Also if you are making minimum payments yet continue to use the card, your utilization percentage will show up in the balance that increases every month which can have an adverse affect on your score.

With that said, is it a good idea to pay off your credit cards every month? Not necessarily. One of the bureaus score factors is “lack of recent revolving balances”. The bureaus models like to see at least one card that has a small balance on it. If you pay off all your credit cards every month and your credit report shows no revolving balances it can actually have a negative affect on your score. So it is a very good idea to always keep a small balance on at least one credit card. It can be a balance as small as $20 but you need to have a credit card that has at least a small balance on it.

What about timing? Is there a better time during the month to pay off/down your credit cards? It’s actually a good idea to pay your credit card bills before they are due. It will save you money in interest over time and it reduces your chances of incurring a late fee since late fees can occur if you are even one day past the due date.

As far as your credit score is concerned, when you pay your credit card bill can be tricky. A lot of consumers are under the impression that creditors report to the bureaus at the beginning of the month. So if they are trying to improve their score by paying down debt they think that paying the bill before the end of the month is the way to go. But that’s actually not correct. Every creditor reports differently. Some report at the beginning of the month, some at the end, some in the middle, some twice a month, some every other month, etc. Your credit score is a snapshot at any given moment and actually can change daily depending on when your creditors report to the bureaus.

The best ways to handle your credit cards is to pay the bill before the due date; try to keep the balances below 20% of the high credit; if you pay your credit cards off every month, try to keep a small balance on at least one; and try to make more than the minimum payment each month. Credit card debt can be tricky but with a little forethought you can keep a handle on your debt and still maintain a good credit score.