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Paying your credit cards on time to avoid late fees and interest is a breeze. But you can also increase your creditworthiness and reduce the interest burden by paying your credit card bill even earlier, possibly weekly, as this is your daily balance that will affect the calculation. Keep the following in mind when deciding if your card’s weekly payout is the right move for you.
Why paying early can save you money
Credit scoring models like FICO and VantageScore score higher if you only use a small portion of your available credit. This measurement of how much credit you are using is known as Use of creditwhich is 30% of your total credit score. Typically, the closer you are to 1% of total credit used, the better it is for your credit score (0% may indicate dormant, underutilized, which is why 1% credit utilization is considered ideal).
There’s a catch, however: the due date on your credit card bill only tells you that the billing cycle is over, not necessarily when your current balance is reported to the credit bureaus. For example, let’s say you paid out $ 3,100 on a $ 10,000 limit card for a due date on the 30th of the month, but your card reports your credit utilization on September 15th: you would be charged for a 31% credit utilization , even though you technically pay your bill on time. If, on the other hand, you have paid off your credit card weekly, your usage rate is always relatively low.
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Paying early also reduces interest rates
Paying early can also help you lower interest rates if you have an outstanding balance each month, as the interest you are charged for each billing cycle is based on your average daily balance.
For example, for a card that charges 15% interest, a lump sum payment of $ 500 against a balance of $ 1,000 paid on the last day of your billing cycle results in an average daily balance of $ 983, which translates to $ 12.29 monthly interest . However, if you paid off the balance in the middle of the billing cycle, the average daily amount is $ 750, which will cost you $ 9.38 in interest.
$ 3 isn’t much, but it’s a monthly fee that you don’t have to pay if you can afford to pay more frequently within your billing cycle. Plus, every dollar counts when you’re struggling to pay off debts.