Pay your credit card dues at the end or middle of the billing cycle? Know what’s better

Debt — Late-cycle-payers can likely take full advantage of the credit extended to them each month: Here's how Image Credit: Shutterstock

Dubai: If you’re a credit card holder, you’d be aware that you are to pay credit card bills in full, on time every time. This is because when payments are made within the billing cycle, it can help maximise return on the credit or even help improve your credit score. But is there a better way?

“One advantage that’s often overlooked with late-cycle-payers is that they can likely afford to take full advantage of the credit extended to them each month,” said Rajesh Markara, an Abu Dhabi-based consumer credit analyst.

“Up until the time cardholders actually pay the bill, credit card users can not only earn interest on the money owed, the additional interest this would garner can add up to a significant sum over months and years.” But that’s not all.

What is a billing cycle of a credit card?

The billing cycle refers to the period for which a credit card bill is generated. If your credit card statement is generated on the 10th of every month, your billing cycle will start from the 11th of the previous month and continue till 10th of the current month.

Do you wait until the due date of your next bill?

If you’re in credit card debt and tempted to wait until the due date of your next bill to finish paying off the previous month’s balance, what this means is that for every day you might have had the money to pay even part of that bill, it will still be on record as you owing the full balance.

If instead you paid off your balance halfway through the billing period, the average daily balance for that period would drop by half. Any amount paid down at any time during the period can reduce the daily average balance, i.e. the total daily balance divided by the number of days in the month.

Pay at the end or middle of a billing cycle? An example

Let’s say a cardholder Mr. John has a Dh1,000 balance, and let’s also assume that he paid off Dh500 of his balance at the end of the billing cycle. John’s average daily balance would then be over Dh1,000 (Dh1,000 plus interest charges) for each day of the billing cycle.

Now, let’s compare this to another cardholder, say Mrs. Rachel, who pays off Dh500 in the middle of the billing cycle – who’s average daily balance will be over Dh1,000 only for half of the billing cycle, and then around Dh500 thereafter.

Clearly, Mrs. Rachel would pay less in interest over the course of a month. Depending on the balance and the interest rate, the savings could be significant. This is how you can time your payments in a billing cycle and use them to your advantage.

Credit card stress trouble — If you make a purchase just after your credit card bill is generated, you can enjoy up to 45 interest-free days, and sometimes more. Image Credit: Shutterstock

Tracking billing cycle vital for financial planning

“With each credit card having its own billing cycle, once you are aware of the bill generation date of your credit card, you can maximise your interest-free period,” said Mirin Raul, a Dubai-based advisor on credit and debt-related matters.

“So, for example, if you make a purchase just after your credit card bill is generated, you can enjoy up to 45 interest-free days, and sometimes more. Also, if you pay off all your credit cards a few days before each statement closes, it will help when you're applying for a loan soon as well.”

However, if you’re among the many credit cardholders who pay their bills in full in order to avoid interest, the ‘grace period’ can be a major advantage, added Raul. Let’s say you have a card with monthly statements on the 19th every month with a due date on the 16th of the following month.

What is a ‘grace period’?

A grace period is the period between the end of a billing cycle and the date your payment is due. During this time, you may not be charged interest as long as you pay your balance in full by the due date.

If you then made a big purchase on August 19, right after receiving your statement, the purchase won’t show up on your bill until September 19, and it will be due October 16. That’s basically two interest-free months, which can amount to significant savings for you.

STOCK Credit card — While carrying a balance every month is costly, experts reiterate that most often a clear benefit is the credit that’s been temporarily extended to the cardholder. Image Credit: Shutterstock

Bottom line?

“Most credit card companies allow cardholders to adjust the dates of their billing period so the due date for bills could be made to fall immediately after that day your salary is credited,” added Markara. “For some, this helps with flexibility and simultaneously keep a low ‘credit utilisation’.”

What is ‘credit utilisation’?

‘Credit utilisation’ is the percentage of your total credit used from the total credit available to you. Your ‘credit utilisation ratio’ should be 30 per cent or less, and the lower you can get it, the better it is for your credit score.

While carrying a balance every month is costly, experts reiterate that most often a clear benefit is the credit that’s been temporarily extended to the cardholder. Moreover, when timing a credit card bill payment to your advantage, you also save on interest. But this doesn’t apply to all of us.

“If you’re a cardholder already in debt, rather than deciding to pay at the start or the end of their billing period, you should simply keep working away at what they owe as they can, knowing that it’s not just the total paid off at the end of the month that matters, but the timing, too,” added Raul.

“However, for cardholders unburdened by debt or a waning credit score, waiting to pay until close to the end of a billing cycle will almost certainly increase overall wealth, if just by a little at a time.”