This Simple Credit Card Timing Mistake Can Lower Your Score
Credit cards are a convenient way to make purchases -- stores make it so hassle-free to save your information, and with just a click of a button, you buy whatever you need. However, credit card companies don't make things so easy.
Yes, they want you to use your card so you can rack up interest, but you can unknowingly drop your credit if you pay on certain days, according to financial expert John Liang. The day you choose to pay your credit card bill could "crash your credit score."
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If you're trying to build credit or maintain a high score, here's what you need to know about the best and worst days to make that payment, and why good credit is essential.
Factors That Impact Your Credit Score
Having good credit isn't just necessary to get a loan. Credit scores can influence everything from loan approvals to interest rates. Therefore, it's a big deal to have good credit.
Your credit score is influenced by several factors, but payment history and credit utilization carry the most weight -- at 35% and 30%, respectively.
The Due Date Is the Wrong Day To Pay
Many people pay their credit card bills on the actual due date, which seems like the right time to pay. However, according to Liang, that's the worst day to pay because of credit utilization, which is supposed to be under 30% of your limit. Here's why it's vital for your credit card health.
In the video, Liang gave an example of a credit card statement that begins on January 1st and closes on Jan. 31. What you spend in that month will be due on the due date.
"And your due date typically isn't another 24 or 25 days later," he said. "So Jan. 1 to Jan. 31, you spend, spend, spend, spend, spend. And let's say you spent $5,000 of a $10,000 credit limit."
It's important to note that the closing date isn't the same as the due date. If you wait to pay the entire monthly balance on the due date, it can ding your credit. Why? The closing date is when the credit card companies report to the credit bureaus how much you spent.
"And so on Jan. 31, you have used $5,000 of a $10,000 credit limit, even though you don't owe the bank a penny until the due date, which is 20+ days later," Liang explained.
The credit bureaus don't know you're going to pay the bill on the due date, and to them, it looks like you're using a lot of credit, so your score gets hit.
Pay Your Bill Before the Closing Date
To avoid lowering your credit score, Liang suggested paying the majority of what you owe before the closing date.
"So, from Jan. 1 to Jan. 31, I would actually go ahead and make a payment on Jan. 27, or Jan. 28, so that my utilization is now going to be maybe 5% or 10%, which is then going to be able to boost my credit score," Liang said. "Then on the due date I pay the rest off. There is no penalty whatsoever for early payment."
Be sure to keep a little on your card so it shows you're still using it, though. Then, pay the small percentage off on the due date, Liang noted.
Credit cards are a daily part of life and knowing how to use them properly will not only prevent unnecessary fees, but keep your credit score from tanking.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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