How Paying a Credit Card Works

John Ganotis

John Ganotis

Updated May 30, 2018

All the different amounts on your credit card bill can be confusing. On top of that, you may be wondering how you should pay your credit card bill to avoid interest (finance charges) and maximize your credit scores.

This is a quick guide to help you understand what amount you should pay, when you should pay, and why.

Here’s the quick version: we recommend you always pay the full statement balance on the due date. This makes it easy to stay out of credit card debt while avoiding expensive interest and fees. Paying in full and on time (but not too early) also helps you establish positive credit history. Read on to find out why.

How much should I pay on my credit card bill?

Here’s the first page of the most recent statement I got for my Amazon Prime Rewards Visa Signature (Review):

When it comes to paying the bill, the most important information is in the top right:

This shows me I should pay $1,258.56 on or before 1/23/2018.

The New Balance here is the amount due for this statement period. It’s also sometimes called the Statement Balance or Outstanding Balance.

Under the Account Summary section, you can see this statement is for the billing cycle from 11/27/2017 to 12/26/2017. The New Balance is the amount I owed on 12/26/2017 when this statement was generated. At the top of the Account Summary section you can also see that my previous balance was $482.42, which I paid in full during this past statement period, when it was due.

To make sure you can always afford to pay the full statement balance, it’s important to exercise discipline in how much you spend on credit cards. Don’t spend more than you can afford to pay in full each month. This is where a lot of people get into trouble with credit cards. Once you fall into the trap of paying less than you owe, it’s easy to quickly accumulate debt by spending more than you can afford to pay off in full each month.

If you have a short-term goal to maximize your credit scores, you may want to pay a portion of your balance early, before your statement period even closes. Read this post all the way to the end for details on that.

What is the Minimum Payment?

My bill says the Minimum Payment is $25.00. If I can just pay the minimum due, why would I want to pay any more than that?

Some people make the mistake of thinking the Minimum Payment is the amount they should pay each month. All you need to do is look at this table on my credit card statement to see why it’s a bad idea:

If I were to only pay the minimum, it would take me seven years to pay off this $1,258.56 credit card bill! And, I’d end up paying over $750 in interest fees during that time!

Since 2011, credit card companies have been legally required to include this table on credit card statements to help you understand why it’s a bad idea to only pay the minimum. Even in the second example on the table, paying a little less than double the minimum, it would take me three years and cost me about $325 in interest. Not a smart move.

Introductory 0% APRs

There is an exception, though, where it might make sense to only pay the minimum. If you use a card with a 0% intro APR offer, whether it’s a card with a 0% APR on purchases or a card favorable to balance transfers, you’ll have some time when the bank doesn’t charge interest. In this case, it’s important to at least pay the minimum each month so the bank still considers your account in good standing, with no late or missed payments.

You can get by only paying the minimum, at least for some of the introductory period, since you won’t have to pay interest on the balance you’re carrying. But, make sure you have a plan to pay off that whole balance before the introductory period ends so you can avoid interest. Otherwise, you’ll be stuck with credit card debt that’s accumulating interest.

Here’s a simple plan you could use for 0% intro APRs: divide the total amount you owe at the beginning by the number of months in the intro period. Pay at least that amount on time each month. By the time the period ends, you will have paid off the entire amount, and avoided interest completely. To be safe, divide by one less than the number of months in the introductory period to give yourself an extra cushion.

Getting out of credit card debt

If you’ve found yourself in debt or paying the minimum every month, consider the avalanche method for paying off your debts. You may also want to look into balance transfers. Transferring debt to a card with a lower interest rate can help you get out of debt sooner by reducing the cost of interest as you pay it off, which complements the avalanche method well.

What is the grace period on credit cards?

In the example above, I made purchases during the 11/27/2017–12/26/2017 statement period, but the due date for that statement period was not until 1/23/2018. This 28-day gap from 12/26/2017 (the end of the billing cycle) to 1/23/2018 (the due date for that billing cycle) is the grace period.

Since I pay the entire statement balance by the due date every month, the bank won’t charge interest on these purchases. But if you don’t pay off the entire statement balance you can lose that grace period. Depending on the terms of your card, the bank may charge you interest on purchases back to the date they were made, new purchases going forward, or both.

When you look at the Schumer Box in the terms for a card, this is the section that vaguely explains how the grace period works. Here’s that box for my Amazon card:

Legally, if a credit card company offers a grace period (as most do), they must give you at least 21 days from when you get your statement to pay before they start charging interest on new purchases. Note that most cards, like in the example above, only provide a grace period on purchases, but not on balance transfers or cash advances.

To put this another way, even though I spent more on my card after this 11/27/2017–12/26/2017 statement period closed, I didn’t have to pay off those purchases by the 1/23/2018 due date. They’ll be due the following month on 2/23/2018.

Here’s a table to show you how the due dates, statement periods, and amounts due line up. I’ve included information for my past few statements. Notice how the Due Date for each statement period falls during the next statement period. So, on 12/23 I payed for purchases that were made between 10/27 and 11/26. If I bought something on 10/29, for example, I didn’t actually have to pay for it until 12/23, almost 2 months later. And I still didn’t have to pay any interest on it.

Cycle Start Cycle End Due Date New Balance Due
9/27/2017 10/26/2017 11/23/2017 $1,271.96
10/27/2017 11/26/2017 12/23/2017 $482.42
11/27/2017 12/26/2017 1/23/2018 $1,258.56

When I log into my Chase account online between 12/26/2017 and 1/23/2018, I’ll see new purchases I made during that time period. The account’s total balance on their website will be higher than $1,258.56 because of those new purchases. However, since I’ve been paying on time and in full every month, I can still avoid interest by only paying $1,258.56 by the 1/23 due date.

If I were to pay any amount less than $1,258.56 by 1/23, though, I’ll get charged interest on those purchases back to when they were made. I’d also lose my grace period on any new purchases I make. The only way I’d be able to get the grace period back is by paying off the balance in full.

What does Available Credit mean?

You may have seen something on your credit card statement that says Available Credit. What does that mean? Is it money sitting in an account somewhere that’s up for grabs?

Don’t make the mistake of thinking this is the equivalent to store credit, like when you have a gift card for a store.

A credit card is a type of flexible loan. You can spend up to a certain amount at one time, which is determined by your credit limit. Here, the credit limit of the card ($12,000) is shown as the “Credit Access Line.”

The next line, after the Credit Access Line, the statement lists Available Credit. This amount the remaining amount the credit card issuer will let me spend right now. Otherwise, if I want to spend more, I’ll have to pay some money back first.

Available Credit is roughly your credit limit minus the current balance of the account. In this case, since my credit limit is $12,000 and I currently owe $1,258.56, I’m authorized to spend up to $10,741 more right now, before I pay anything back to the credit card issuer, since $12,000 – $1,258.56 = $10,741.44. Most credit card issuers will round off any partial dollars, like the 44¢ in this case.

When should I pay my credit card bill?

First of all, don’t pay late. If you can’t afford to pay the full statement balance, pay at least the minimum by the due date. On top of any fees your bank may charge for late payments, a late payment on your credit reports can stay there for seven years.

Generally, we recommend that you pay the full statement balance on the due date. This lets you maximize the grace period while avoiding late payments. If you do this, make sure you allow enough time for your payment to process so it will post on the due date.

Credit card issuers can vary in how long they take to post a payment to your account. For the first few billing cycles, you might want to allow ample time to see how long payments take to process. Check with your specific bank to find out what counts as an on-time payment if you’re paying on the due date, and how long payments take to post to your account. You can get details by calling the customer service phone number for your financial institution.

Most credit card issuers will let you set up online payments from your checking account or savings account so your bill will automatically get paid on the due date each month. You’ll often be able to pick from several options, like the minimum due, a fixed amount, or as we suggest, the new statement balance.

This is a great option to avoid late payments and credit card debt. If you do set up automatic payments, be sure to review your statement before the payment date so you can identify and deal with any fraud or unauthorized transactions that may show up on your card.

Is it bad to pay off my whole balance before the statement period closes?

Some people pay their accounts down to $0 early, before the statement is even generated. When the bank generates the statement it shows a $0 balance, or nothing owed. In my example, this would happen if I had paid off the $1,258.56 in new purchases before 12/26/2017.

A $0 balance on your credit reports can make it look like you’re not using a card. As long as your account has a grace period, paying your balance off early like this is unnecessary. It won’t save you any money on interest, and can result in lower credit scores, since the credit card account doesn’t appear active. If you’re trying to establish credit for the first time, paying off your card early can hold you back.

Getting your grace period back

If you’ve carried a balance in a previous statement period, you may have temporarily lost your grace period. Many credit cards work this way. That means all new purchases start accruing interest immediately on the day they’re made.

If you’ve lost your grace period, you’ll usually need to pay off your entire outstanding balance down to $0 (not just the previous statement balance) some time during your statement cycle. Check the terms of your card or call the phone number on the back of your card to get details about how you can get your grace period back if you’ve lost it. With most cards, you’ll only need to do this for one billing cycle, then you can go back to paying your statement balance in full on the due date to avoid interest and make the most of your grace period.

How to pay when you want to maximize credit scores

There is one situation where you may want to pay some of your balance early.

Credit utilization, or how large your balances are compared to your credit limits, is a major factor in credit scores. In FICO scores, 30% of the points come from this factor.

You can figure out your utilization on a card easily: divide your credit card balance by the credit limit of the card. For example, if you have a $500 balance on a card with a credit limit of $1,000, your utilization is 50%.

A lower percentage is generally better. So, if you have a $100 balance on that same card, instead of $500, your utilization is only 10%, which is seen as better by credit scoring models. The exception is 0% utilization, or paying a card down to $0 before the statement closes, which was covered in the previous section.

With most credit scoring models, utilization doesn’t have a history. What matters are the balances and credit limits on your credit reports right now, regardless of what they were in the past.

If you’re going to be applying for a new credit card or loan soon, you may want to maximize your credit scores by reducing your credit utilization, even though you’re already paying off your cards on time and in full every month.

You can reduce the balance reported to credit bureaus, and thus utilization calculated by credit scoring models, by paying a large portion of your outstanding balance before the statement period closes.

As you can see on my statement at the beginning of this post, my card’s credit limit is $12,000. Even though my balance is about $1,200, that’s still only around 10% utilization for this one card, which is not bad at all. Let’s say I were to spend around $6,000 on this card in a month, which would be 50% utilization. If I didn’t have much available credit on other cards, that could make my overall utilization high, temporarily dropping my credit scores.

If I know I’m not normally planning on spending that much on this card every month, and I’m not applying for new credit any time soon, I probably wouldn’t care. I’d just continue using the card and paying it in full on the due date every month as usual. But if I were applying for a mortgage in a few months, for example, I may want to maximize my credit scores by reducing the reported utilization.

In that situation I may decide to pay $5,000 early, before the statement closed, so only a $1,000 balance would be reported on my statement, and to credit bureaus. That would put this card around 8% utilization. If I wanted to get extreme with it, I could shoot for a balance of $120, or exactly 1%, by paying $5,880 before the statement closing date.

You could go nuts trying to prune your credit utilization to 1% every month, but that’s probably a waste of time. This technique could be helpful, though, if there are a few months where you’re spending a lot on credit cards, but also applying for new credit.

Do you have any questions that weren’t answered here? Hit the Ask button and I’ll get back to you right away. If you want to learn more about building credit with credit cards, check out this guide.

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