Credits cards nowadays are present in almost all wallets but I am pretty sure that only a few of us understands how it actually works. Understanding the functioning of a credit card is a bit complicated and hence people are seen to be making various mistakes in using credit cards. The misuse of a credit card can make people spiraling downward into a debt trap. Many of the credit card holders are in a wrong notion that they only need to pay the minimum due on time, and can carry forward the balance which will save them from occurring interest payment.
When you pay your credit card bills in full and on time, it is considered as a very good financial habit. But do know you that paying credit card bills before time is a worth appreciating financial activity. This financial activity is like icing on the cake. We all know that there are many reasons to pay off your bill on time but paying credit card before due date attracts more benefits for the cardholder.
Benefits Of Paying Off Credit Card Bills Early
It Boosts Your Credit Score
Paying credit card bill before the statement is a very effective tool to boost your credit score. An early payment reflects well in your financial status and hence it brings a positive impact to your credit score too. If your credit score is low and you want to improve it soon then you can use this simple but useful method for a quick improvement of credit score.
Helps to Make a Budget
Budgeting is the key to manage your personal finance skillfully. When you make the credit card bill payment early, you will know how much amount is left in hand. Knowing the exact amount will make you plan accordingly for the rest of the days of the month. Instead of that, if you start spending without paying off your credit card bills you may end up with more dues as well as paying a high-interest payment.
Lower Your Debt to Income Ratio
The income-to-debt-ratio is the ratio of your monthly in hand income and the debt you owe. Let’s say your monthly income is Rs. 50,000 and your debt is Rs. 10,000. In this scenario, your debt-to-income-ratio is 20%. The ideal debt-to-income-ratio should be less than 40%. If your debt-to-income ratio is more than that, you won’t be able to avail a new loan. When you pay off your credit card bills early, your debt to income ratio lowers. Keeping your debt to income ratio low is very important as if it is high, you will not be allowed to take a credit even in emergencies.
Frees Up Your Credit Card Balance
Credits cards are pre-approved revolving credit. Credit cards come with a credit limit which you can borrow and pay back. Once you pay back, the same amount will be ready for borrowing. Let’s understand the same with an example. Let’s say a credit card has a maximum credit balance of Rs. 50,000. You have used Rs. 20,000 in the present month, your credit balance will come down to Rs. 30,000. If you pay off Rs. 20,000 in the following month, your credit balance will once again be Rs. 50,000. So in this way, you can use the credit balance again and again. When you pay off your credit card balance early, you can use it back whenever needed.
Avoid Interest Charges
The interest rate and late fine both starts accumulating when you miss your credit card payment. If you have enough fund then it is always better to pay off your bills every month. When you pay off your credit card bill by the due date, you are free from paying interest. One can avail this convenience as most of the credit card providers don’t charge interest if the due is paid within the due date. This period is counted as an interest-free grace period by credit card providers. If you pay only the minimum payment, the balance amount will start accumulating interest.
Whether a credit card is a boon or curse depends on the way it has been used. Never to deny the fact that none other financial tools are as fast as a credit card when it comes to a financial urgency. But the same credit card can turn into a debt trap when it is not used well. Being disciplined in paying off credit card bill is the key to enjoy the benefits while avoiding the drawbacks of the same.