Understanding Your Credit Card Balance

For consumers who actively use their credit cards, it’s important to understand the details of different account balances and how they apply to payments and potential charges. A misinformed consumer can end up paying unnecessary interest or carry too much debt on their month-to-month balance without the right understanding. 

The statement balance is issued once a month on what is known as the statement closing date, and includes all transactions on an account during one billing cycle, as well as any unpaid balance/fees from previous billing cycles. After the issuer provides the statement balance to the cardholder, that balance does not change until the next billing cycle closes. For consumers looking to avoid paying interest charges on their account, it's important to pay a statement balance in full by the due date, as long as it's financially feasible to do so. 

For those who can’t afford to pay their entire statement balance, making the minimum payment will keep the account in good standing. Paying the minimum, an amount set by every card issuer, ensures that no late fee or penalty will be assessed to the account. However, paying only the minimum amount will not prevent interest from compounding on a cardholder’s balance, which will be charged to the consumer until the statement balance is paid in full. In addition, paying only the minimum on an account with a large revolving balance (over 30% of the card’s credit limit) can negatively impact a person’s credit utilization ratio. 

The current balance (or outstanding balance), as its name implies, is the card’s current balance at any given point. Transactions made after one billing cycle ends and before the next one closes are not reflected on the statement balance, but do appear on the current balance. It is not necessarily important to pay off a current balance, since paying off a statement balance in full will prevent interest charges and other potential fees. However, one could potentially lower their credit utilization ratio to zero by paying their current balance before the statement closing date, which is beneficial when applying for certain loans, like mortgages.

Knowing your billing cycle is crucial, as far as avoiding late or missed payments. A billing cycle is the time frame that is reflected on every new statement balance, and every cycle has a corresponding due date. The point from when one cycle ends (statement closing date) to the due date is known as a grace period, which is typically 21 days, but can also be closer to a month in length. 

The grace period represents the amount of time a cardholder has to pay off their statement balance in full to avoid paying any interest. Technically, a consumer will lose their grace period if a statement balance is not paid in full, as accruing interest will be charged from that point on (and during every subsequent grace period) until the outstanding balance is completely paid off.

It’s also important to know that while most billing cycles are roughly a month long, they do not typically start on the first of the month. As a result, cardholders need to stay vigilant about their due dates. Options like auto pay and payment alerts are useful tools, but consumers must ensure they have enough available funds to pay off a statement balance, as a rejected payment can result in a penalty and negatively affect a credit report. 

Understanding the entirety of a credit card statement, and how different payments affect an account’s standing, is important for all cardholders. Consumers who pay off their statement balance by their respective due date will benefit by avoiding interest charges, while also boosting their credit score in the process. On the other hand, people only paying the minimum amount, while avoiding late fees, will continue to pay interest and may negatively affect their credit due to a high credit utilization ratio. For consumers looking to build up their credit with timely payments, Fiona can match you with credit card offers to get you on the right track.