Should you pay your credit card bill early?

While it’s commonly known that there are consequences to paying your credit card bill late, you might wonder what happens if you pay it early. Aside from potentially protecting yourself from late fees and high interest charges, paying your credit card early can indirectly affect your credit.

Below, CNBC Select looks at whether it’s good to pay your credit card bill early and how doing so might affect your overall financial health.

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Lower credit utilization rate

One of the most noticeable benefits of paying your credit card bill early is that you can lower your overall credit utilization rate, also known as your debt-to-credit ratio. John Ulzheimer, formerly of FICO and Equifax, previously told CNBC Select that while the optimal credit utilization rate is 1%, “less than 10% is much more doable and it will serve your scores well.”

If you make payments to your card before the payment due date, you can lower your overall credit utilization rate, which is a positive sign for credit lenders. Credit utilization is one of the factors that determines an overall credit score, so continuing to keep a low credit utilization ratio could improve your score.

Avoid late payment fees

Paying your credit card bill early is a simple way to avoid late payment fees. Aside from the fee, missed credit card payments may be reported to the credit bureaus, meaning your credit score and APR could also be affected.

Credit card late payment fees can be as high as $41 for each missed payment. However, there are a few cards, such as the Citi Simplicity® Card, which have no late fees whatsoever, and some cards, like the Discover it® Cash Back, which may waive your first late fee.

Time to resolve payment issues

Many credit cardholders pay their bills by linking their credit card to a bank account and transferring the money that way. By paying your credit card bill early, if there are ever any issues with the payment process, such as bank transfer issues or insufficient funds, you have time to correct them before any payments are officially due. If you wait until the day the payment is due, you might not have any wiggle room should you run into unforeseen issues.

Save money on interest

The golden rule of credit cards is to pay your balance in full when possible to avoid expensive interest charges, also known as a credit card deadbeat. If you only pay the minimum balance required on a credit card, you will be charged interest on the remaining balance and new purchases you make.

However, paying your bill in full isn’t always feasible. If you have to carry debt into the next month, you don’t need to wait until the next billing cycle ends to pay the balance. Most credit card issuers charge interest daily based on your annual percentage rate (APR), so the earlier you pay the balance, the less you’ll pay in interest.

Better budgeting awareness

Paying your credit card bill early allows you to track your spending better and make adjustments as needed. If you pay your bill halfway through the month and notice you’ve been spending too much dining out, you can spend the second half of the month trying to cut back.

Budgeting apps like You Need a Budget (YNAB) can also help you keep track of your finances. For example, YNAB uses the zero-based budgeting method where users allocate every dollar into a category.

While paying your credit card bill early isn’t inherently bad, there are a few potential drawbacks to be aware of. For instance, you don’t want your credit utilization ratio to drop too low. 10% utilization is recommended as it shows lenders and credit card issuers that you actively use your card. If you continuously pay your card early and keep your score too low, you might prevent a positive boost to your credit score. After all, a 0% credit utilization rate suggests that you aren’t making any purchases on your card, which isn’t as good as using it responsibly in the eyes of credit card companies.

In addition, if you’re paying your credit card bill early, you still need to ensure you have enough cash in your checking accounts to cover your other expenses. Paying early means you will have less cash available to you at any given time, and that extra cash could be making you money.

Instead of paying your bill early every single time, consider putting your extra cash into a high-yield savings account like UFB Portfolio Savings. With no minimum balance and no monthly fees, this account can help provide some interest on funds that otherwise would have been used to prematurely pay off your bills.

Paying your credit card early does not directly affect your credit score, but can still positively influence it. If you pay your bill early, you lower your credit utilization, which can help your credit score.

Similarly, paying your bill early can also mean you’re not taking full advantage of certain situations. If you carry no balance on your card at all, a credit utilization score of 0% is not as influential as one in the single digits.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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For rates and fees of the Discover it® Cash Back, click here.