A credit card is a convenient financial tool that can facilitate everyday purchases. It can also be used as a fund for transactions or events that the individual’s financial position cannot meet. However, while making purchases with a credit card, it is imperative to understand that the amount of credit acts as a loan that needs to be repaid. Such loans have a fixed annual percentage rate (APR) listed in the credit card agreement. Many factors such as payment history, creditworthiness, and credit card type determine the APR. For instance, individuals with stable credit history have access to lower rates of APR than individuals with lower or no credit history.
All credit cards have a credit line. This refers to the maximum limit of credit available to the individual for making purchases. The income levels and current availability of funds determine the credit line. As purchases are made, the balance keeps on changing. This balance reflects the total fund available to the individual for making purchases. Making credit card payments or dues on time is an effective way to ensure a good relationship with the lender. It increases the chances of lending loans and gives scope for the grace period. The top five reasons for making such payments before the due date are listed below:
A credit score reflects the individual’s financial well-being and status. This is why all lenders always check the credit score before lending loans. Whether or not you will be able to pay the Equated Monthly Installments (EMI) depends on the credit report that many organizations prepare. Organizations such as Credit Rating Information Services of India Limited (CRISIL), Credit Analysis and Research (CARE) Limited, and Credit Information Bureau (India) Limited determine an individual’s credit score. When early credit card bills are paid, it shows that the individual has control over debts and can make repayments before due dates. Therefore, any credit card bill payment will automatically improve the credit score before the due date.
The debt-to-income ratio shows the portion of the individual’s total income, which is spent towards repayments of debts. Such debts can be either rent, mortgage, credit cards, or other financial obligations. There is a direct relationship between this ratio and early payment of credit card amounts. This means that paying off credit card debts before the due date automatically lowers the debt-to-income ratio. The ideal ratio ranges between 21-35%. Maintaining a good debt-to-income ratio is crucial as it is one of the factors all lenders check before giving loans.
Lenders charge interest amounts for delayed payments on credit cards. This interest increases the overall burden on the individual to repay the loan as interest is accumulated. Prior payment of credit card bills before due dates directly ensures no interest amount charges. Furthermore, issuers also give paid-in-full accounts a grace period that is interest-free and which lasts until the next due date. It is advisable that if the individual fails to make full payment, then part payment must be made before the due date. The interest charges are calculated based on the average daily balance during the billing period. The average daily balance decreases when the full or part-payments are made.
Having a proper financial plan is essential to ensure appropriate management and flow of funds, precise evaluation of income and expenses, and set a budget. If payment of credit card dues is made in advance, the individual can know the total balance available for spending. This, in turn, will help in budgeting the expenses to ensure adequate availability of funds. Furthermore, this also helps while availing various loans from lenders, including personal loans, mortgage loans, or two-wheeler loans.
The period for credit payments to reflect in the balance is about one to a few days. This shows the available balance in the account. The timing of the credit card payments is essential, as shown in the individual’s credit report. Payment of amount before the due date shows the lower balance on such reports. However, this is subject to additional payments before the due date. If such credit card payments are made before the due date, it frees up credit, and a higher amount is available to the individual for extra purchases.
Credit cards are the best tools for facilitating individuals’ purchases who can pay the monthly dues on or before the due date. It is essential to use these cards responsibly because it can result in a combination of rewards, building credit, handling unexpected exigencies, and ensuring a good relationship with the lender. Furthermore, responsible usage and paying credit card bills on time can build a better history of payments which can later help while applying for various loans, including two-wheelers, housing, or personal loans.