Although I literally charge everything possible on my credit card to earn credit card rewards, when my credit card bill comes in the mail, I generally owe no more than $150. This amount, which is a small percent of my available credit and a fraction of what my family spends every month, is reported to the major credit bureaus as my outstanding debt. And my credit score reflects this.
Many, if not most people can improve their credit scores by taking the same approach I use. This is especially true for people who charge a lot, but pay their bills in full every month. However, even if you don’t pay your bill in full every month, paying what you would otherwise pay above your minimum payment can make a difference in your credit score.
The reason why having a low balance on your monthly statement can have a big positive impact on your credit score relates to your credit utilization ratio, also known as CUR.
CUR accounts for around 30% of your credit score. It is calculated by dividing your outstanding balance by your available credit. For example, if you have a $10,000 credit limit and owe $4,000, your CUR is 40%. This isn’t horrible, but its not great either.
If you generally pay 25%, 50% or 100% of your balance at the end of the month, then waiting until your billing period closes to make your payment is more than likely knocking a good deal of points off your credit score. If you made the bulk of your payment before the end of the billing period, your CUR would drop significantly, and your credit score would rise.
Finally, there is one small caveat: make sure you have enough money to pay the monthly minimum when your bill arrives, as paying your card early doesn’t free you from your monthly payment, regardless of its size.
While this little credit score boosting tip won’t help those who only make minimum payments, those who pay the majority of their bills every month might be presently surprised at the impact paying your credit card early can have on your credit scores. And, because your credit score impacts everything from credit card rates to car insurance rates, a better credit score can help you save a lot of money in the long and short term.