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We focus a lot of time and energy discussing travel rewards credit cards here at TPG. These cards are a great way to boost the account balances in your various loyalty programs, opening up fantastic redemptions like first-class flights and luxurious hotel rooms. However, there are a number of misconceptions out there when it comes to credit cards, so today I’ll continue our new series that debunks these myths and allows you to begin planning for your next vacation.
Previous entries included having too many cards, closing a card you don’t use, not paying your balance in full and paying an annual fee. Today I’ll continue looking at your credit score and debunk a common myth regarding the timing of your payment.
Myth #13: Paying your statement balance before your due date helps your credit score.
In the world of credit cards, timing is everything. Just about every sign-up bonus is earned after spending a certain amount of money in a given time frame, and certain benefits (like the $250 airfare credit on the Citi Prestige Card) will reset each calendar year as opposed to each cardmembership year, allowing you to schedule your purchases to maximize the perk. And of course, if you don’t pay your balance in full on time, you’ll be subject to interest charges that can negate the value of any points or miles you earn.
There are quite a few hobbyists who take the timing of their payments to a different level and believe that paying their statement balance early can actually improve their credit score. Unfortunately, this is not the case, and it all comes down to the factors that impact your credit score. As we’ve covered before, there are five of them:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
Remember too that these are not equals, as some are weighted more heavily than others:
The theory behind this decision is that an early payment will prevent your balance from being reported to the credit bureaus, which will impact the amounts owed. However, that’s not the case, as your statement balance is reported to the credit bureaus, even if you pay it in full the day after it closes. While paying your statement balance early won’t hurt your credit score, it won’t help it any more than paying it on the due date would.
Naturally the next thought is to pay your card even earlier, as I’ve read reports of travelers setting up payments a couple of days prior to their statement closing. The rationale is the same: Prevent the credit bureaus from seeing the amounts you owe to improve your score. In theory, this is true. Unfortunately, this has the opposite effect on the most important aspect of your credit score: your payment history.
If you choose to pay your credit card account before your statement actually closes, you’ll have a balance of $0. This will then be reported to the credit bureaus. The next month, you do the same thing and again have $0 reported. If you continue on this cycle, your amounts owed (commonly referred to as your credit utilization rate) will remain at 0%, but your payment history will also be nonexistent. Think about it; because you pay your balance before your issuer can even report your balance to the credit bureaus, it appears that you are simply not utilizing your credit card account(s). Remember that your credit score is a reflection of how well you manage the credit line that has been extended to you, so if it appears like you aren’t using your card, there’s no reason for your score to go up.
For additional recommendations for managing your credit card account(s), be sure to check out my Ten Commandments for Travel Rewards Credit Cards.
We always recommend paying off your credit card statement balance in full every month, as this will ensure you don’t get hit with late fees or interest charges that can negate the value of the points and miles you’re earning. However, as long as you pay your balance on or before your payment due date, your credit score won’t be impacted. Don’t fall into the trap of believing that you should pay your account off before your statement actually closes, as believe it or not, this could wind up preventing your score from improving by giving the credit bureaus the impression that you simply aren’t utilizing your account(s) at all.
Have you ever paid your statement balance early to try to improve your credit score?
Featured image courtesy of Sean Russell/Getty Images.
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