Is It Wise to Pay Off Your Credit Card Balance Before the Statement Period Closes?
The notion that leaving a credit card balance on the books until after the statement period can improve your credit score is a complete myth. In fact, paying off your entire balance before the statement period closes is the optimal approach.
Risk-Free Compounding of Benefits
Allowing a balance to carry over until the next month primarily benefits the credit card companies. The remaining balance incurs interest, which the card issuer collects. This can be a double-edged sword.
When it comes to reporting to the credit bureaus, both your payments and your credit card usage at the end of the statement term are factored in. Paying your entire statement balance ensures that the credit card company reports that you made a payment and your utilization is 0. Lower utilization is generally better for your credit score. The interconnected nature of credit is peculiar: it's essential to demonstrate that you have available credit while only using a small portion.
What if I Am in the USA?
For users in the USA, the scenario is a bit different. If you pay your card balance before the statement is generated, you effectively show a zero balance to the credit agencies. This can look like you are not utilizing credit, which might not be desirable, as credit scores reflect your ability to responsibly manage credit.
To strike the right balance, it's recommended to use your credit card for budgeted purchases, set aside the funds for the future bill, and allow the statement to be generated before paying it off. Personally, I pay the statement balance on the due date, using an interest-earning savings account to store the money in advance. This approach allows me to earn a bit of interest, pay the bill on time, avoid interest charges, and maintain a high credit score due to my consistent use of credit.
Conclusion
While there is no harm in paying off your entire credit card balance before the statement period closes, being aware of the broader credit scoring landscape is crucial. Make the most of your credit card responsibly, and don't hesitate to seek professional advice for tailored strategies that suit your financial situation.