Prepayments on a credit card help you reduce your balances faster with fewer interest charges. But when exactly should you make a prepayment, and what’s the best way to prepay credit card balances to make faster repayment progress?
When to Prepay a Credit Card
- When you have high credit utilization. If you use more than 30% of your available credit lines, it might be due for one (or many) prepayments on your balance. Repaying your credit card balance drops your total credit utilization, which helps keep your credit score high.
- When the rate is higher than your mortgage rate. Credit card companies are very good at bringing low interest promotional offers to consumers. Some of these offers go as low as 0% for months, or even a year or more. But when your credit card debt becomes your highest interest debt, it’s time to make a few prepayments to get your balances back in line.
- Pay twice per month, if you can. Repaying your credit card debt keeps your balances from growing larger from the devastating effects of compound interest. You can almost always make more than one payment on your credit card during a billing cycle. So, if you find extra cash in your bank account, it might be time to start thinking about a prepayment to reduce your balance – even if you already paid your bill this month.
When Not to Prepay
Try to avoid prepaying your credit card before a billing cycle is over. Making a payment before you get a statement from your credit card company exposes you to problems or errors before you have the opportunity to spot them.
Finally, prepay when you have enough liquidity to make a big prepayment. It makes little sense to pay down a credit card, only to have to use it again at the same high interest rate. Always build up an emergency savings fund to give you a buffer should you suddenly find yourself short on cash.