How to Time Credit Card Payments to Improve Your Credit Score
Setting up auto payments for credit card payments is a great way to avoid accidental fines and late fees, but there is an additional trick that can help with your credit score. By paying your balance in full before the closing date – the day the balance of the debt is reported to the credit bureau – you can ensure that your credit utilization is low, which is a key factor in determining your credit rating.
What is the closing date of the credit card?
This can be confusing as most people only know the due date on their credit card, which is when you have to pay back a portion of your outstanding debt each month ( usually 1-3% of your total statement balance , including interest and fees). The due date is still the most important date to remember, as late fees or higher interest rates will be charged in the event of a default payment.
However, you also have a “closing date” when the remainder of your debt is sent to three major credit bureaus (Equifax, Experian, and TransUnion). Since 30% of your credit rating is based on your credit utilization rate – or how much debt you have at the closing date – this is the perfect time to pay off your remaining balance with a scheduled automatic payment. This can easily lead to a difference in your credit score of at least 30 points .
Wait, how does it work?
As an example, suppose the due date is the 10th of the month and the close date is the 14th. You might decide to pay off the full $ 1,500 credit limit debt on the due date (the 10th), but then you may spend the money after, before your closing date (the 14th) – say, $ 500. In this case, your reporting balance will give you more than 30% credit utilization, which can hurt your credit rating ( the less you use the better ).
Instead, you could take a more strategic approach by paying at least the minimum amount on the due date (or more) and then clearing out the remaining amount just before the closing date, thus optimizing the loan utilization rate.
Ok, but how do you set up automatic payments?
Most credit card companies will allow you to schedule automatic payments to pay off your credit card on a specific date. To do this, log into your account and look for automatic payments, which are usually found under the Payments tab. From there, you should:
- Set up automatic payment for the due date (you can specify the “minimum payment” – whatever that amount is).
- Set up an automatic payment on the closing date (you can specify the “outstanding balance” – whatever that amount is). The only problem here is that the closing dates vary and they are usually not mentioned on the monthly statement, so you’ll want to confirm the date by contacting the credit card company directly.
That’s pretty much it. If not, there are some caveats: this strategy works best if you’re already using your credit card sparingly for purchases that can be returned relatively quickly. Also, the ‘set and forget’ approach to automatic payments can cause overdraft fees if you don’t have enough money, so it’s best to keep a cushion of cash in your checking account (or keep a close eye on your balance).
And as Nerdwallet points out , some banks may have a couple of days’ processing delay even for “automatic” transfers, so you might want to group payments accordingly to account for the delay (you can ask this when you ask your Closing Date).