Transcription
Hi Bank, I'm here to pay my monthly credit card bill.
Oh, no worries, Jonathan. Your due date isn't for another 24 days. You can just pay me then.
I could, but isn't it right if I pay on this particular date? I could potentially boost my credit score. Yes, let me guess, you learned this one from me, John. For all of the daily credit tips as well as finance tips, welcome back to the channel, folks. For those of you that are returning viewers, you all know we talk about everything from free food at Chipotle to buying your first rental property and everything in between. And in today's particular video, we are talking about the single best day to pay your credit card bill that could potentially boost your credit score. Oh, is it paying on Sunday? No. Huh? Then it must be Wednesday. Not that Fridays. None of those. The date is the statement close date or closing date, and that's what we're going to talk about in this video. It's going to break down into two sections. Section one, we're going to talk about all the factors of a credit score and how to get that perfect 850. In section two, we're going to talk about this particular special date that has helped me boost my credit score by 30 points. If that sounds like a plan, sit down, pop a squat, type the thumb icon, you know what to do. We're going to dive right in.
Section one, credit score overview. For those of you who don't know, your credit score has five key components. We're going to quickly walk through all five, and I'm going to teach you exactly what you need to do to optimize them so that you can be on your path to an perfect 850. So the first component and the heaviest weighted is on-time payments. This accounts for 35% of your credit score, and as the name would imply, it is all about making payments on time. That's that's it. There's nothing else to it. Every single time you're getting your credit card bill, making sure that you're paying your statements on time. Every single time you get a mortgage, make sure you're paying it on time. If you do that, you'll be rewarded. Though, quick caveat, if you miss your due date, it's not the end of the world. In fact, you have until 30 days before the credit card companies tell the bureaus that you're late. However, if you do miss your due date, you're going to be assessed the late fee. So don't miss the due date, but if you're a day or two behind, it's not going to be the end of the world. Just pay it off as soon as you can.
Second component is credit utilization, and this accounts for 30% of your credit score. Credit utilization is simply how much of your credit are you actually using? As an example, let's say you get a credit card, you've got a $10,000 credit limit. Let's say you go buy some items and you charge $5,000 of a balance onto the $10,000 credit limit. That would mean that your credit utilization is 50%. Now, the general rule of thumb is to keep that utilization under 30%. I recommend keeping it under 10%. If you start going over, you're actually going to get dinged because it's showing creditors, wow, John's using a lot of his available credit. That seems really risky to us, so we're going to ding him. And this is the section we're going to focus on a little later when we talk about the best day to pay your credit card bill.
The third component is your average length of credit history, and that accounts for 15% of your credit score. This basically looks at how old is your oldest account and what is the average length per individual account on your credit profile. Most important thing to keep in mind here is do not close your very first card ever if you can avoid it. Now, if it's a terrible card, we can talk about it, but for the most part, don't close that very first card. The other thing though is you actually can continue to close cards you get subsequent to that. A lot of people think, don't ever close a card, it'll impact your average length of credit history. But the fact is, if you close a credit card that's in good standing, you paid it off completely, it will continue to age on your credit profile for 10 years, giving you that positive boost.
The fourth component is credit mix, and that accounts for 10% of your overall credit score. This is just looking at if you have different types of credit accounts, so a credit card, an auto loan, a home loan. Basically, a credit card is a revolving based credit, whereas a home loan or an auto loan is an installment based credit.
The fifth component is hard inquiries, and that accounts for 10% of your credit score as well. Another word for hard inquiry is a hard pull. It's when you go and apply for new credit and they pull your credit report. Thing to keep in mind is with hard inquiries, they fall off after two years. So taking a look at all five components, we can see that on-time payments and credit utilization account for 65% of your score. In other words, if you pay on time and in full, you are well on your way to having a great credit score. But here is now a way to boost that even more by focusing specifically on the credit utilization front, which counts for 30% of your score, and that's what we'll talk about in the second section, which is the best date to pay off your credit card bill.
Remember earlier in the video how I said the best date is the statement close date or the closing date, which is not your due date? Wait a minute, I thought we were supposed to pay everything on the due date. You are, you absolutely are. However, and this is the hack. Remember earlier, we also said credit utilization is how much of your total credit are you using relative to how much credit the bank gives you? Okay, that makes sense. But how do the credit bureaus know how much you're actually using? Well, that actually requires somebody to tell them. John's using 10%, 20%, 50%. And when they tell them that, that particular date is the statement close date. So let's crystallize this with an example. Pulling up here, my Chase Sapphire Reserve, I got up a $24,000 credit limit. Let's say last month I go and I charge off a bunch of things and I ended up making $10,000 worth of total purchases. I've got $110,000 and I would go ahead and pay off my credit card bill. However, take a look here, my closing date was April 7th, which means on April 7th, Chase takes a screenshot and sends it off to the credit bureau saying, John has used $110,000 of his $24,000 credit limit, which is about 41, 42% or so. You might be thinking, well, what's the big deal? On the due date, I'm just going to go ahead and pay it off, which I absolutely am. But you see, my due date isn't until the 4th of May. So from April 7th to May 4th, the credit bureaus are saying, wow, John's using 42% of his credit. We're going to ding him. And so the smart thing for me to do is be very well aware of when my closing date is. And a closing date is typically like a 30-day window or so, and making sure that I pay off as much of my credit card bill as possible before the closing date or the statement close date, so that when Chase goes and reports to the credit bureau, it's like, oh, John only has used $11,000 of his $24,000 credit limit. Great. That is much better and it's not going to negatively ding him. Actually, it might positively impact my credit score. Hopefully that makes sense. So go ahead, pull up your credit card statement and look for that statement to close date and make sure that if you have big charges coming up, if you're going to get a loan or an auto loan or whatever, that you are taking out as much of the use as possible before the statement close date, which is typically 20, 24 or so days before the due date.
And on the left here is actually an example of this scenario playing out. So at the end of last year, I was charging off about $7,000 against my Sapphire Reserve, which actually shouldn't have been that big of a deal, but it dropped me by 30 points. The reason I say it shouldn't have been a big deal is because there was only 30% utilization. But regardless, this showed me that, hey, listen, you actually have a huge charge. This is what's pulling you down. And then on this side right here, I ended up paying it off and look at that. Boom, came right back up. So that is an example of how credit utilization can really pull you down or pull you right back up. And the best way for us to control that is making sure that if we have massive charges coming up and that we have the cash for it, to not wait until the due date, but pay off before the statement close date to close it out.
Some of y'all might still be thinking, well, I want to pay on my due date because of the way my paychecks are coming in. Is it a big deal if I wait till my due date? I don't care for the flux of my credit score. Then I say, absolutely no problem. You can pay off on the due date. You're not going to have to pay more interest. That's totally fine. But I'm saying for those who are like, ah, I get a 20 to 30 point swing in my credit score and I'm going for a home loan and this might make or break it, then I say, pay your credit card bills before the statement close date to keep the utilization low so that you could potentially positively boost your credit score a little bit before you go for that loan.
Now, folks, if you have any comments, questions, drop them down below. I will catch you all next video. Peace.