Rajeev is a middle-aged banker and has recently started using a credit card. He is a person who is wary of excessive debts and is aware of the interest charges being levied on credit card debt. And some of his family members have advised him to pay off the credit card outstanding as soon as possible, so he does not even wait for the bill date, he ends up making multiple payments during the month.
Recently he read that making multiple credit card payments during a month can help him raise his credit scores. He was glad that he was doing the right thing. But he was not sure, hence he wrote to us for advice on if multiple card payments can really help his credit score move up.
At the outset, we would like to congratulate Rajeev for being proactive with his credit card debt and paying off the outstanding even before the due date. With this, he can at least avoid paying late payment fees, penalties, interest, etc.
However, is multiple payments to your credit card really required and does it help your credit score are the primary concerns that need to be addressed here.
As your credit coach, CreditMantri always looks to provide you with the right advice to help you navigate through the world of credit in an easier way. Hence, in this case also, we will analyze the pros and cons of making multiple payments to your credit card, which will be helpful not only to Rajeev but many of our readers.
Credit Cards and its Impact on your Credit Score
You are aware that each credit activity of yours has a bearing on your credit score. Following are the factors that affect your credit score, which would in turn be affected by using multiple credit cards.
- Regular Repayments: Regular repayment on your credit card outstanding is one of the main factors affecting your credit score. It means how regular you have in repaying your outstanding dues.
- Credit Utilisation Ratio: This ratio is calculated by considering the amount spent on your card in relation to the credit limit. If you have multiple cards, then a combined figure is considered. Ideally, the figure should be below 30%. If you are reaching your credit limit often, your credit score will reduce.
- Credit Mix: A judicious mix of secured borrowings like home or vehicle loan and unsecured borrowings like personal loans or credit cards is helpful for a good credit score.
- Credit History: Credit Cards can help you build your credit score as these accounts are not closed, unlike loan accounts which are closed after repayment. A credit card can be held by the user for any number of years. Lenders are known to prefer those who demonstrate long and responsible periods of dealing with credit.
- Hard Inquiries: Each application to credit creates a hard inquiry. Increased number of hard inquiries are detrimental to your credit score.
After having known how using your credit card can impact your credit score, let us move on to analyze the how will multiple payments affect your credit score.
Credit Utilisation Ratio and Multiple Payments to Your Credit Card
As we have seen in the paragraphs above, credit utilization ratio is calculated based on your usage on your card in relation to the set credit limit. The ideal ratio prescribed by experts is 30% of your credit limit.
For Example: If your Credit Limit is set at Rs 1,50,000, then you should ideally be spending up to Rs 45,000 on your credit card during a particular billing cycle.
At the outset, it looks easy and manageable. However, there is another point that needs to be considered here.
While it is easy to maintain this figure during your billing cycle, the factor that needs to be considered is the point of reporting by your lenders to the credit bureaus, as they consider the balances outstanding on that date. An unfortunate fact here is that a normal customer of a bank or financial institution is not privy to this information.
Let us look at an example to illustrate this better.
Assuming that an individual has a billing cycle of 30 days starting from 20th of a month on his credit card. So, the bill is generated on the 19th of each month which is due for payment before 05th of the next month.
Suppose this individual has a credit limit of Rs 1.5 lakh and he religiously spends within the limit of 30% or Rs 45,000. And to make maximum utilization of the credit period, he times his spends towards the beginning of the credit period and pays just before the due date. So, after the bill is generated on 19th, this individual spends another Rs 50,000 on his card before the 31st of the month.
Incidentally, his lender reports all card balances within the 1st 5 days of a new month. Hence, in this case, on the day of reporting, the card has an outstanding balance of Rs 45,000 (from last statement as it is not paid yet) and Rs 50000 from the next billing cycle. Hence, an amount of Rs 95000 is shown as balance outstanding on the card against a credit limit of Rs 1.5 lakh.
This results in the Credit Utilisation on the day of reporting being shown as 63.3%, which is considered quite high and may result in your credit score going lower.
Hence, when there is no information on when your balances are reported to the credit bureau, making multiple payments to the credit card may come across as a good strategy to keep your credit utilization ratio under check.
Check out our other tips to keep your credit utilization ratio low.
As per our example, Rajeev might be in a safe space considering he makes multiple payments on his card. But is it essential?
Is Multiple Payments To Your Credit Card Essential?
There is no one straight answer to this question. It would mainly depend on your spending, credit limit and the time of your spending. As we have seen, there is no way to know the schedule of reporting followed by your lender.
On the other hand, if you end up making multiple payments through the month, then the very purpose of using a credit card is not met. As you understand, a credit card is an excellent instrument that is not only convenient, but also allows you certain period of credit. If you end up making payment after each usage, then you might rather be better off using cash or a debit card.
Hence, multiple payments (max of 2) may be good only in cases like below.
When you have incurred a big expense on your card
Or if you have a very low credit limit
When you incur a very big expense (in relation to your credit limit) on your card like booking air tickets for your international holiday or purchasing a flat screen TV, etc. in addition to your usual expense, then it may be prudent to pay off some amount.
Or if you have a card with really low credit limit, then making multiple payments may help keeping your credit utilization low.