Editorial Policy

When's the Best Time to Pay your Credit Card Bill?

Eva Norlyk Smith Ph.D.

March 20, 2012

QHi Eva,

I got my first credit card about three years ago. I don&#039t use it much, but I make sure to charge some things each month so I can raise my credit score. I&#039ve been paying off the entire balance before the due date, but my friend said that&#039s wrong. She says I need to carry over a balance past the due date so that it gets reported to the credit card bureaus. Is that true? If it is, I guess I could leave a balance — but a small one so I don&#039t have to pay that much interest. And what is the best timing for making payments so that the credit agencies know about them? I only got this card so I could get good credit and get a house soon, but now I&#039m worried I&#039m doing it wrong. — Sheena

ADear Sheena,

Not to worry, you are doing just fine. Paying off your credit card balance in full before the due date each month is exactly what you need to do to build a good credit history.

Is it possible to pay the balance too early? Well, yes. If you pay the credit card balance off before the card issuer reports the balance to the credit rating agencies each month, your credit card balance will show zero each month. The upshot is that it will look like your credit card is inactive.

However, this is a subtle technicality, which you don&#039t have to worry about, as long as you pay after receiving the credit card bill and before the due date. Most card issuers report the credit card balance to the bureaus shortly after the statement closing date. The statement closing date takes place before the credit card statement gets sent out, several days before you receive the credit card bill in the mail. A few banks report the balance as of the last business day of the month.

In other words, keep doing what you&#039re doing. Your credit card usage is being reported correctly to the credit bureaus, as is your excellent payment history.

With that point out of the way, you might want to consider expanding your efforts to build your credit score beyond that one credit card. It may sound counter-intuitive, but it&#039s to your advantage to use more than one type of credit, and even to have more than one credit card. To understand why that is, let&#039s take a quick look at the components of FICO scores.Ask Eva

Payment history (35 percent of your FICO score): A little more than a third of your credit score is made up by your payment history — in other words, whether you pay your bills on time. This includes not just your credit card bill, but bills that go into collection. In other words, while a late utility bill won&#039t show up on your credit report, one that goes into collection will.

Credit utilization (30 percent of your FICO score): Also known as the debt-to-credit ratio, credit utilization is a measure of how much of your available credit you use each month. For top credit scores, credit utilization ideally should be below 10 percent, which means that you don&#039t use more than 10 percent of the available credit each month. At the very least, never let the credit utilization go above 30 percent of the available credit limit.

This is where having just one credit card can get tricky. If the credit card has a fairly low limit, such as $500, and you charge a modest $250 each month, you&#039re using 50 percent of the available credit. So while paying the balance off in full will get you a top rating for payment history, you won&#039t get top points on the credit utilization component.

Having more than one credit card can help boost this part of your credit score because credit utilization is calculated using the combined credit limits across all your cards.

Length of credit history (15 percent of your FICO score): This part of your score tracks how long you have been using credit. The fact that you began using credit three years ago is a definite plus, but relatively speaking, your credit history is still fairly short. Expect this part of your score to get stronger over time, particularly as you being to use more types of credit.

New credit and credit mix (10 percent of your FICO score): Opening a lot of new credit accounts within a short amount of time is considered a negative because it could be a sign that the cardholder is in financial trouble and needs access to a lot of credit. At the same time, however, having many different types of credit is considered a plus.. Having a mix of credit cards and installment loans, such as a car loan or a mortgage will help boost your score as well. The key here is to open accounts gradually over time.

Your best option right now? Continue doing what you&#039ve been doing. You&#039re well on your way to building excellent credit. If you want to add a few extra things to boost your score, consider these two possibilities:

  • Ask to get your credit limit increased. If the credit limit on your credit card is low (below $2,000), call your card issuer to see if you&#039re eligible for a credit limit increase. With a higher credit limit, it&#039s much easier to keep the credit utilization within the recommended limits. After three years of responsible usage, you should be eligible for a credit limit increase — just explain that you&#039re looking to build your credit score and want a higher credit limit to ensure your credit utilization always stays low.
  • Apply for one more credit card. It is best to build your credit history around more than just one credit card account. Consider getting one more credit card, and alternate use between the two of them, switching cards every three to four months. Alternatively, you can set up one credit card to pay one of your monthly bills each month, so it shows usage without you having to spend much time managing it.