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How Paying a Credit Card Works: Understanding Your Credit Card Statement12 min read
A credit card doesn’t have to cost you anything. Learn the details of credit card statements so you can avoid debt and finance charges (interest) while building great credit.
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 guide to help you understand what amount of money you should pay, when you should pay, and why.
Here’s the quick version: We recommend you always pay the full statement balance by 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 may also help you to establish positive credit history. Read on to find out why.
How Much Should I Pay on My Credit Card Bill?
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 make the minimum payment due, why would I want to pay any more than that?
Some cardholders 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 that’s a bad idea:
If I were to only pay the credit card minimum payment, 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 charges 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. Here’s how those numbers look on a graph:
Introductory 0% APRs
There is an exception where it might make sense, at least financially, to only pay the minimum monthly payment. 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 credit card account in good standing, with no late or missed payments. (Of course, because an outstanding balance may increase your revolving utilization ratio — aka the percentage of credit limit used — paying just the minimum may not be a good idea from a credit scoring perspective.)
You can get by only paying the minimum, at least for some of the introductory period, since you won’t have to pay credit card interest charges 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 costly interest charges.
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 intro period ends, you will have paid off the entire amount, and avoided interest completely.
- Consider dividing by one less than the number of months in the introductory period, just 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, which involves tackling the debt with the highest interest rate first. You may also want to look into balance transfers to help speed up the debt repayment process. 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. Balance transfer offers make a good complement to the avalanche method, and they can be used together effectively.
Why should I pay more than the minimum payment?
To sum it up, if you’re only paying the minimum required payment, you’ll end up carrying the rest of the balance over to the next month, which will usually result in interest charges. Paying off your entire statement balance each month will help you avoid those pesky interest charges.
What Is the Grace Period on Credit Cards?
Most credit cards have a grace period. A grace period is the amount of time between when your statement period ends and your billing due date. During this period, your credit card purchases won’t accrue interest, as long as you pay the full statement balance each month. This lets you completely avoid interest, and potentially use credit cards for free as long as you avoid other fees.
If you don’t pay your statement balance in full, you’ll usually lose your grace period. If that happens, credit card purchases will begin to accrue interest immediately. You can get your grace period back by paying off your balance in full.
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 known as the credit card grace period.
Since I pay the entire statement balance by the due date every month, the bank won’t charge me interest on these purchases. But if you don’t pay off the entire statement balance by the due date, you can lose that grace period. Depending on the card terms, 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), it must give you at least 21 days from when you get your statement to pay before it starts 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 paid 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 as long as I paid the full balance (which I did).
|Cycle Start||Cycle End||Due Date||New Balance Due|
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 (sometimes known as your credit line). 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 is 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, make at least the minimum payment 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. Paying by the due date 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. Paying slightly before the statement closing date may help maximize your credit scores.
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 your credit card 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. You should also ask 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 amount 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.
We recommend setting your autopay date to about five days before the payment due date. This will give you some time to catch any errors, like returned payments, before the due date comes and you’re hit with late fees and interest.
Credit Card Closing Dates Explained
Your payment due date is of dire importance, but it’s not the only date that plays a major role in the credit card payment process. You should also have a clear understanding of your statement closing date.
Your credit card’s statement closing date falls at the end of the billing cycle, and it marks the day that your statement is generated. Every transaction you make with a credit account between one statement closing date and the next closing date will appear on your following statement.
As we mentioned above, you don’t actually have to pay the bill on the statement closing date to avoid interest. You’ll just have to pay by that billing cycle’s due date, which will generally be a bit later.
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.
This will be good in general for your credit scores, but in most cases it’s probably unnecessary. As long as your account has a grace period, you can take more time to pay without any penalty. Paying early won’t save you any money on interest (as long as you have that grace period).
However, if you’re aiming to improve your credit scores rather than have more time to pay, paying your balance before the statement closing date can help because it lowers your overall credit utilization. In almost every case, having a lower credit utilization is better for your scores — the exception is that 1% utilization is technically better than 0%. But the difference is quite small and not very important for credit building purposes, so it’s generally easiest to aim for 0% utilization if you want to improve your credit.
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 (or even all) 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 are largely based on 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 of credit utilization is generally better. So, if you have a $100 balance on that same card, instead of $500, your utilization is only 10%. This is seen as better by credit scoring models. The only slight exception is 0% utilization compared to 1%, which was covered in the previous section (lower is better, except 1% is better than 0%).
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. This is where having a higher credit limit can help you. A higher limit on a credit card gives you more room to work with in terms of your credit utilization.
For example, a $500 balance on a credit card with a $1,000 limit equals 50% utilization. But a card with a $500 balance and a $5,000 limit is only 10% utilized. Even though the balance is exactly the same in both scenarios, the card with the higher limit would likely result in higher credit scores since it keeps your utilization rate lower.
If you’re going to be applying for a new credit card or loan soon, you may want to maximize the credit score points you get 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 the utilization calculated by credit scoring models, by paying a large portion of your outstanding balance before the statement period closes. In other words, you can pay some or all of your balance in full before the statement closing date.
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.
I could also aim for 0% utilization by paying the balance in full before the statement closing date. While that utilization ratio wouldn’t be as good for my scores as the 1%, it would be better than anything else.
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.
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