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I'm in the habit of paying off my credit card balance immediately - as in, after I make a purchase and as soon as it appears on my bank account, I pay it off before I even get a statement.

I've never ran into any interest this way - but I've been wondering, is there any practical reason to carry a balance on my card? I'm not asking if I should carry a balance to the end of the billing period and accrue interest - just if there's any reason to hold off on making payments until I receive a billing statement.

user541686
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Zibbobz
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    It sounds like you would gain a few hours a month of free time by paying bills once or twice a month instead of daily. – Aaron D. Marasco Jul 26 '16 at 00:20
  • @AaronD.Marasco Many (but not all) bills have a pre-authorized debit payment option – Nayuki Jul 26 '16 at 02:58
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    @Nayuki : which is better if we stay really far from. In many cases, after you cancel a service, they will continue subtracting payments, and interestingly, when they offered you the service they were really helpful, but when canceling or complaining about yet another subtracted payment after cancellation, they suddenly become hard to reach. It can happen even with genuine internet or mobile phone providers. I guess they hope customers don't realize a few months of extra bills or that they won't go to court for such relatively small sums. – vsz Jul 26 '16 at 06:18
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    @vsz - For services this can happen, I agree. For credit cards, with a direct debit set to "full payment", they only take whatever the balance on the card is. (Unless you set it to "full payment", then make a manual payment just before they take their automated payment; in this case they might still take the original "full payment".) [NB This comment is possibly UK specific] – AndyT Jul 26 '16 at 08:33
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    I wonder why you even bother using the credit card if you then pay it off straight away? Seems like a huge hassle for no reason? – Lightness Races in Orbit Jul 26 '16 at 10:50
  • @AndyT: Happened to me once. Whoops. – Lightness Races in Orbit Jul 26 '16 at 10:51
  • @Nayuki That has nothing to do with the credit card the question is asking about. The OP clearly states they do not do that with the credit card. P.S. It was a humorous response. – Aaron D. Marasco Jul 26 '16 at 12:23
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    @LightnessRacesinOrbit Points? Cash back? – Aaron D. Marasco Jul 26 '16 at 12:24
  • @AaronD.Marasco: They kindly reversed the additional payment :D – Lightness Races in Orbit Jul 26 '16 at 12:39
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    @LightnessRacesinOrbit Also insurances, for example when buying a plane ticket. – ereOn Jul 26 '16 at 12:42
  • @ereOn: I imagine making use of those insurances to be much much easier when the charge is outstanding. – Lightness Races in Orbit Jul 26 '16 at 12:44
  • @AaronD.Marasco Since I only ever use the credit card for groceries and other 'more than a few dollars' purchases, and since it all falls under a single card, that's more like a few minutes than a few hours saved, but, still true! ;) – Zibbobz Jul 26 '16 at 13:13
  • @LightnessRacesinOrbit I was answering your "why bother" question. Your response confused me until I went back. – Aaron D. Marasco Jul 26 '16 at 13:16
  • @AaronD.Marasco: Oh, lol – Lightness Races in Orbit Jul 26 '16 at 15:21
  • @LightnessRacesinOrbit also in some countries (Germany, Poland) you may get a ATM card you cannot pay online so you need a credit card to be able to use Steam. – Maja Piechotka Jul 26 '16 at 22:51
  • @MaciejPiechotka: That's a good reason – Lightness Races in Orbit Jul 26 '16 at 22:57
  • "I'm not asking if I should carry a balance to the end of the billing period and accrue interest" - Except you won't accrue any interest in that situation. As long as you pay off the full statement balance at the end of each billing cycle you should never be charged any interest. – aroth Jul 27 '16 at 06:39
  • @aroth Maybe I'm using the wrong term - what would you call the end of the cycle at which you need to pay the balance that has accrued, just before interest starts to build? That's the date that I meant - not the exact date that the bill shows up, but the date past which interest would start to accrue. – Zibbobz Jul 27 '16 at 13:47
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    @Zibbobz I think that would be the due date? The way the post is worded it sounds like you're paying off each individual transaction immediately. As in, you put a $10 lunch on your card and then at the end of the day make a $10 payment to your card to cover the cost of lunch. Doing that would take a ton of ad-hoc time and effort, and not save any on interest. If you're saying that you wait until you receive a bill for your monthly transactions, and then pay the full balance at some point before the due date, that's the best way to use a credit card. – aroth Jul 28 '16 at 00:03

6 Answers6

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Is there any practical reason... to hold off on making payments until I receive a billing statement?

Yes, a few:

  1. You save time.
  2. If there is an issue with your purchase, you have better ability to file a dispute with the credit card company.
  3. You have additional liquidity, so that (in an extreme example) if someone comes up and demands lots of money or they'll kill you, you might have enough that you can stay alive for a bit longer. This also applies to other sudden unexpected expenses, especially ones that can't go on a credit card. Parking or traffic tickets, for example, often can't be paid with credit card and are lower amounts if you pay early (though it's best to just not get them at all if you can avoid them). The extra liquidity sometimes buys you a little more time and financial breathing room.
  4. As Joe points out, you get the float, but especially in our current low-interest-rate environment that might not matter that much unless your bank balance is near some boundary point there's an incentive to stay above.
  5. As Aganju points out, at least some credit cards report your balance due and (sometimes) payments made to at least some credit bureaus and this information shows up on your credit report when requested by lenders (or by you; you can and should request/review a free copy at least yearly). An account that regularly shows $0 balance due and $0 high balance shows up as an account that's not actively used. Regularly borrowing and paying off money demonstrates you're a more reliable repayer than someone who just doesn't use the card, and it helps your credit score to have a small but nonzero balance reported, which you pay off in full without incurring interest charges. This Bankrate article has more detail, at least nominally including quotes from reliable sources:

As for a zero balance, FICO consumer affairs manager Barry Paperno says, "The idea here is the lower, the better, in terms of the utilization percentage, but something is better than nothing....The score wants to see some kind of activity."

How low should you go? In a recent interview, FICO spokesman Craig Watts said, "If your utilization is 10 percent or lower, you're in great shape as far as utilization goes."

That being said, there are downsides especially if you wind up forgetting to make a payment. The easiest thing to do (also from a time management perspective) is to get your billing statement once a month, verify the purchases on it, and at that time you receive the statement schedule an online bill payment so that it will be paid in full before the due date.

As Aganju points out, you don't have to wait for a paper bill in hand or even an e-mail notification; you can go online after your statement date to get the statement. This makes sure you won't have extra costs related to unreliability of mail (if you still receive paper statements)/e-mail, though it does require remembering to check (and/or setting a recurring calendar reminder).

Paying much in advance of that, as is your current practice, might be a good idea to free up available balance if you are planning a purchase that would take you over your credit limit, but this should be relatively rare (and some credit card companies will raise that limit if you have been paying well and ask nicely, though find out first if they do a "hard pull" of your credit report for that).

Community
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WBT
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    3 is not a valid point, it is fearmongering. Consider replacing it with a form of emergency bill that can't be paid off via credit card? – Pimgd Jul 26 '16 at 08:16
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    @Pimgd: Preparing for the unexpected is not "fearmongering"; it is common sense. – Lightness Races in Orbit Jul 26 '16 at 10:50
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    @LightnessRacesinOrbit not if this involves you being at gun(or knife)point...? Are you keeping cash on hand to pay muggers? Would you fear for your life if you didn't have cash on hand, lest a mugger attack you and shoot you because you didn't have cash on hand? – Pimgd Jul 26 '16 at 10:51
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    @Pimgd: You talk as though muggings at cashpoints never happen, which is certainly not true. – Lightness Races in Orbit Jul 26 '16 at 10:53
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    @LightnessRacesinOrbit I think that keeping cash available with which to pay off an attacker should not be a thing. I don't live in America, so maybe this is due to cultural differences, but here in Europe, I don't expect to get robbed at all. I think an emergency fund is for things like medical bills and car bills and other stuff breaking down. I don't think it is for paying off an attacker. I think that a society where nobody had cash to pay off an attacker would be better than a society where everybody had this cash, because if nobody had such cash, the attacker might stop trying. – Pimgd Jul 26 '16 at 11:48
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    Anyways, I think this answer would be better off using an example that is not reliant on malicious losses (getting robbed) and instead reliant on accidental losses (e.g. being able to buy stuff when you need it if, say, some of your property catches fire, or car breaks down, or...) ... Lastly, @LightnessRacesinOrbit if what you say is true, I suggest you buy and carry a weapon, so that if such a mugging occurs, you draw your weapon instead of your cash. – Pimgd Jul 26 '16 at 11:51
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    @Pimgd: Don't know why you assumed I'm American, but I live in Europe too. "I don't expect to get robbed at all." That's silly. People get robbed all the time in Europe. Let's be clear: I don't save so that I can pay off a mugger, but that is one extreme example of why having some liquidity could be useful. That's what the answer is saying. "I suggest you buy and carry a weapon" No, because that would be extremely illegal. – Lightness Races in Orbit Jul 26 '16 at 12:11
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    @LightnessRacesinOrbit I don't know how to put it then? The answer would be better if it used a more probable event to support point 3. The situation as described is unlikely. ... As for the suggestion to buy an carry a weapon, that's the result of my assumption that you're American; I hear they're pretty tolerant of carrying weaponry for self-defense over there. – Pimgd Jul 26 '16 at 12:14
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    @Pimgd: Okay. :) – Lightness Races in Orbit Jul 26 '16 at 12:21
  • Though it should be a rare/extreme example, #3 happened to me and to friends, both in & out of the US. I needed an example of a large surprise expense one couldn't charge to a credit card. If I did not have sufficient resources to satisfy the rather high demand, I would not be alive today. @LightnessRacesinOrbit Carrying a weapon would not be illegal in the US, in large part for reasons like this, but it can be rather dangerous, not only because of criminals (it probably wouldn't help in a situation like that), accidental discharges, & toddlers etc. but police too (e.g. Philando Castile). – WBT Jul 26 '16 at 14:06
  • @WBT: I'm not in the US; it's definitely very illegal here – Lightness Races in Orbit Jul 26 '16 at 15:22
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    This is a very good answer that catalogues all the possible reasons for keeping a balance, and offers some good advice on how to handle it as well - Thank you WBT. :) – Zibbobz Jul 26 '16 at 15:34
  • Why would they kill you if you don't have that cash? Doesn't get them anything, but makes the police pursue them much harder. – Nobody Jul 26 '16 at 17:47
  • @Nobody because they know that in practice, the police won't pursue them. – WBT Jul 26 '16 at 17:48
  • @WBT Then you/they live in a pretty dysfunctional country. – Nobody Jul 26 '16 at 17:49
  • @Nobody That might be the case, but not necessarily. It's economically rational e.g. when (A) the attacker is unknown, and evades detection, and the police are too busy with other work, and (B) when the attacker is or is friends with the police. (B) suggests a higher level of dysfunction than (A). – WBT Jul 26 '16 at 17:53
  • @Nobody If an attacker is going to think about it with that kind of rationality and logic, I assume they would typically do so before they make the threat, and if they didn't (or did, and arrived at the conclusion that it was better to go ahead anyway) I wouldn't bet my life on them in the heat of the moment (1) carefully considering the consequences of failing to keep their word or failing to do what they say they will AND (2) perceiving the same consequences you do. – WBT Jul 26 '16 at 18:09
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If you wait to pay it off until you are required to in order to avoid interest (the end of the 'grace period'), then you are receiving what's known as a 'float' - basically, you have some money earlier than you would otherwise. Banks and other companies profit substantially from floats (such as when banks take your deposited check and put a seven day hold on it) by investing that money in money-making activities and not allowing you to use it until later.

As an individual, particularly if you're not a frequent investor, you typically benefit less than a bank would from a float, since you have less options for investing that money with a short turnaround. Technically speaking it's sort of like you're getting a constant advance on your paycheck 21-40 days; so in that sense, you benefit because you get to have that stuff (television, food, whatever you're buying on credit) a month or so before you have to pay for it, and you get a month or so's benefit from it.

So, yes, you get a small benefit from paying your bill when it's due and not prepaying. Whether that benefit is worth the potential downsides (forgetting to pay and accruing interest) depends on your habits.

Joe
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    So, basically, if I needed or wanted to use that money in the intermediate time, I could, and that's the only benefit of not paying it off right away? – Zibbobz Jul 25 '16 at 20:35
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    That's the benefit, yes. – Joe Jul 25 '16 at 21:58
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    @Zibbobz - Not the only benefit, no. My current account (if you're in the US, read "checking account") pays 0.25% annual interest. If my monthly credit card bill is about £500 a month, then by waiting until the end of the grace period I have an average of an extra £250 in that account. That's an extra 62.5p per year in interest. [This is obviously a theoretical benefit rather than a practical one...] – AndyT Jul 26 '16 at 08:36
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    @AndyT: Don't spend it all at once :D – Lightness Races in Orbit Jul 26 '16 at 10:48
  • @AndyT Doesn't that only work if the interest capitalizes on it before the end of that grace period? – Zibbobz Jul 26 '16 at 13:16
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    @Zibbobz - My current account interest is based on my average balance. If I had £1000 in it for 6 months, and £0 in it for 6 months, then I would get the same interest at the end of the year as I would have if I'd had £500 in it for 12 months, i.e. £1.25. So any time that there is more money in my account, I get more interest. – AndyT Jul 26 '16 at 13:34
  • @AndyT I would consider 'putting the money in an account at 0.25% interest" to be "using the money", but perhaps that's being pedantic. :) – Joe Jul 26 '16 at 14:42
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There is a reason - your credit score. If you ever take out a mortgage, you might pay dearly for your behavior.

The bank where you have the credit card reports the amount on the bill to the credit rating agencies. If you pay before the bill date, they will always report zero. You should wait at least till the day after the billing cycle ends, and then pay off (you don't need to have the paper bill in your hands - you can see online when the cycle closed).

Depending on your other financial behavior, this will have between zero and significant effect, on the percentages you get offered for car loans, mortgages, etc.

Aganju
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I'm not asking if I should carry a balance to the end of the billing period and accrue interest

Typically (I say typically because there may be some fringe outlier exception product that begins accruing interest immediately), if you're not carrying a balance already you will not be charged interest for carrying a balance during the billing period.

You accrue a balance, you're issued a statement, if you pay the statement before the due date indicated you don't pay interest; even if your statement balance is less than the current actual balance on the account.

If you carry a balance through that due date you begin to accrue interest. Not only on the balance carried but on all new charges as well. But as long as you consistently pay your statement balance before the statement due date you will not be charged any interest.

As for a reason why you may want to take advantage of this, simply to ease the administration of your finances. You just don't need to touch the accounts that frequently to avoid interest charges. Sure you can let your money sit in an interest bearing account and earn a couple dollars a year but really, you just don't need to focus on your CC charges this frequently.

quid
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As Joe mentioned, you can carry a balance on your credit card for some grace period (typically 1 month). You will not be charged any interest if you pay your balance at the end of the grace period.

I think of it as a way to get liquid immidieately for making purchases. For example, you want to make a large purchase but your funds are in some investment account which might take ~1 week to get to you. You can use the credit card to make the purchase and use that grace period to move your money from investments to checking account and pay for your purchase (without paying anything extra). This helps you keep your money invested and not having to keep large amounts in checking/savings account, which does not generate any returns.

Punit Soni
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The simple answer is that what you are doing is an incredible waste of time. The normal process is to charge, say, in January, the bill is cut at month end, and due by the 15th of February. No interest accrues. As long as the credit line is sufficient for your monthly spending, that's it.

Now, if you are watching your score closely, utilization might become an issue, if the statement amount is much over 20%, there's an impact to your score. This is easily addressed with a second monthly payment, made just before the bill is cut.

Keep in mind, the phrase "carrying a balance" commonly means not paying the bill in full, and letting interest accumulate. I understand you didn't mean that. The way you are paying your account isn't common, and really serves no value.

JTP - Apologise to Monica
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