Credit cards can seem like simple products, but how they work can be mysterious. Most cardholders don’t realize there are key dates each month, and that making a charge or payment before or after those dates can decide how much interest they pay and rewards they earn. It can even affect their credit scores.
But once I learned how my card’s monthly billing cycles worked, I was able to manipulate it to my advantage…
1. Avoid interest charges
I was always taught that the best way to use a credit card is to pay each month’s statement balance in full and on time. In this way, you take advantage of a grace period that allows you to pay no interest on charges. The grace period begins after the statement closing date on your credit card and lasts until the payment due date. By law, this grace period must be at least 21 days long.
When my finances were tight, I used to count the days until my credit card’s statement closing date approached, so I could gain an additional month on their grace periods by postponing large transactions until the day after the statement closing date.
For example, if my card’s statement closing date was June 20 and I needed to make a charge on that day, I’d have to pay it in full by July 11 — 21 days later — in order to avoid interest charges. But if I held off on that purchase until the next day, the charge would appear on my next month’s statement, and I’d have until about August 10 to pay the charge without incurring interest.
So, postponing purchases by just a few days often allowed me to pay my statement balance in full each month, potentially saving me hundreds of dollars in interest charges.
2. Earn more rewards
Along with never paying interest, I’m always trying to use my credit cards to earn additional reward points or miles. When I need my rewards in a hurry, I try to make charges just before their statement closing dates. This is because rewards are distributed based on a cardholder’s balance as it appears on their statement.
For instance, if I’m a few hundred miles short of what I need for a frequent-flier mileage award ticket, I can choose to make a larger purchase or pay a large bill just before the statement closing date in order to receive the miles sooner.
Over the years, I’ve learned the hard way that frequent-flier awards become much harder to find as the date of travel approaches, and being able to book a flight a month earlier can make the difference between securing an award trip for my family or missing out on it.
3. Incur less interest
Credit card users who carry a balance are incurring interest on all their charges every day. Actually, these cardholders need to focus less on their card’s due date and just make as many payments as possible, as soon as possible.
For example, if you carry a balance of $5,000 at 15 percent interest, you’ll incur about $2 a day in interest charges. So, if you wait the 21 days from the statement closing date until the payment due date, you’ll incur at least $42 in additional interest costs. But there’s nothing stopping you from making a payment on or even before your statement closing dates.
Furthermore, you can continue to make payments as soon as the money becomes available, not just once a month before your statement due date. Just be sure to make at least the minimum payment between the statement closing date and the due date, otherwise your earlier payments won’t count towards your next month’s statement.
If I ever again find myself struggling with credit card debt, I plan on making payments the moment my paycheck arrives, and not any later.
Conclusion: No matter what you’re looking to do with your plastic, understanding the credit card billing cycle helps you save money.
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