Like many older millennials (we’re talking late twenties to early-thirties) I had the great fortune of going to college when it was still legal to aggressively target students for credit cards. Who wouldn’t hand over her Social Security number for a free t-shirt and some pens? The ease at which a college student could get into debt should have concerned parents more than keggers or the threat of an illicit affair with a hunky professor. Luckily, I had two secret weapons:
- My parents explained to me just how to use a credit card to build a credit score – make one or two small purchases each month and always pay the card on time and in full.
- I’d only ever used cash to make purchases prior to college and intensely disliked swiping plastic.
Keeping my parents’ advice in mind, I only got one credit card and used it once or twice a month to buy a tank of gas. But impatience got the better of me when it came to paying the bill. As soon as my transaction posted, I’d immediately pay off the balance. These days, nearly a decade after my freshman year of college, I’ve created a riff on this strategy: pay off my credit cards weekly. It’s a two-fold plan to keep my budget in check and my credit score strong. Here’s why you should implement it too.
Keeping the budget on track
You may not have a firm way of budgeting each month, but you should know your cash flow at the bare minimum by having an understanding of how much is coming in and how much is going out. Opting to do a zero-sum budget, or do a cash diet, or utilize the 50/30/20 rule provides an additional avenue to financial success, but please at least run a cash flow check.
Once you’ve got an understanding of exactly how much wiggle room you have each month, which is determined by the difference between your income and monthly expenses, then you’ll find how paying off credit cards weekly keeps you from overspending.
Waiting to pay off a credit card at the end of each month, especially when you don’t operate within a rigid budget, makes it really easy to overspend because what’s in your checking account isn’t actually how much you have left. There is an easy solution: pay your credit card bill weekly. Now your checking account will be an accurate, or close-to-accurate, snapshot of how much you have left to spend that month.
Say goodbye to feeling overwhelmed when your credit card bill comes in and you realize you can’t pay it all off.
Crushing the credit score game
Paying your credit card bill weekly can also do wonders for your credit score – if you play it right.
First we need to unpack a complicated truth of credit scoring first. You want to have at least a small charge on your credit card when the billing cycle ends. That means you want to have something being reported on your statement. For example, a statement you receive at the end of January may read: “Balance Due: $45. Minimum Due: $20. Due Date: February 23.” As soon as you get this statement you should pay it off in full. There’s no need to mess around with minimum due.
But let’s go back to the why. The reason you want at least a small charge on your bill is so that some utilization gets reported to the credit bureaus. A bill of $0 sounds good in theory, but it could mean in the eyes of the credit bureau you had access to a credit limit and didn’t use any of it. While it’s good you aren’t in debt, it also means you haven’t proven yourself a responsible borrower because it seems like you never borrowed and paid off any money.
30 percent of your credit score is determined by your utilization. Utilization is a fancy term for the amount of your total available credit limit you use. Let’s say your credit card limit is $1,000 and you spend $200, then you’re 20 percent utilized. The goal is to keep your utilization ratio at 30 percent or less. The low utilization ratio can sometimes be difficult if you have a low credit limit, but primarily use your credit card. Paying your credit card off weekly can provide a hack to keep your utilization rate low, which in turn improves your credit score.
Some banks use your statement balance and payment history to report to the credit bureaus. Others may just have a certain date each month that information that gets reported, which may not necessarily have anything to do with your billing cycle. Regardless, if you’re paying your credit card off weekly, then your utilization ratio can stay relatively low. This means – no matter when it’s being reported, you’re keeping your balance and therefore utilization ratio low, which in turn helps increase your credit score.
What are you waiting for?
Credit cards are an effective way to build credit and can certainly be used to earn rewards, but it’s also easy to fall into the debt trap. Paying your cards off weekly is just one way to ensure you don’t overspend. So why wait? Go get started today.