How Paying a Credit Card Works

On this page, we will start by walking you through an example scenario to explain some common credit card terms and how your actions can impact your credit history with an example scenario of getting, using, and paying a credit card. Some aspects have been simplified so this generally fits most cards, but the specific terms of your card may vary from this example. Make sure you read and understand the terms and conditions of any card before you apply.

Get Approved for the Credit Card – June 1

Important Numbers

  • Credit Limit: $1000
  • Available Credit: $1000

New Terms

  • Account Opening Date – The date when you’re approved for the card and the account is opened. You should get the card in the mail within a few days or weeks of being approved, depending on the card or issuer.
  • Credit Limit – The size of the “loan” you have available to spend on your card. This is the maximum amount you can charge to the card before you pay anything back to the credit card company.
  • Available Credit – The amount of your Credit Limit you have available to use right now. Don’t make the mistake of thinking “available credit” means “store credit,” like if you have a gift card for a store! You will have to pay back anything you legitimately spend on a credit card.
Since you haven’t used the card yet, you can still spend 100% of the Credit Limit, so your Available Credit is $1000.

Credit History Impact

The Account Opening Date is reported to credit bureaus as part of this new account. This date can be used in calculating the average age of your accounts in credit scoring models, which generally favor older accounts. Your Credit Limit is reported to the credit bureaus. This is an important factor for your credit utilization, another major factor in your credit scores.

Make a $600 Purchase – June 22

Important Numbers

  • Credit Limit: $1000
  • Current Balance: $600
  • Available Credit: $400

New Terms

  • Current Balance – How much you owe the credit card company, based on up-to-date use of the card. This may also be known as your Outstanding Balance.

By making a $600 purchase on your card, your Current Balance increases to $600. Your Available Credit is the amount of your Credit Limit you still have available to spend after subtracting your Current Balance.

$1000 Credit Limit – $600 Current Balance = $400 Available Credit

Since your Credit Limit is $1000, your Available Credit is now $400.

Credit History Impact

Nothing related to this event is reported to credit bureaus.

Statement Closing Date – July 1

Important Numbers

  • Current Balance: $600
  • Statement Balance: $600

New Terms

  • Statement Closing Date – The last day of the current statement period. This is the cutoff for charges and payments to count toward this statement period.
  • Statement Balance – On the Statement Closing Date, your Current Balance, minus any payments made, plus any extra fees charged by the credit card company, becomes your Statement Balance. Your Statement Balance will not change until the next Statement Closing Date.

Credit History Impact

Your Statement Balance will be reported to the credit bureaus, and this is the balance that will factor into your credit utilization.

Receive Statement (Mail or Online) – July 3

Important Numbers

  • Current Balance: $600
  • Statement Balance: $600
  • Minimum Due: $15
  • Due Date: August 7
  • Next Statement Closing Date: August 10

New Terms

  • Statement – A document you will get in the mail or can view online that provides details about the previous statement period. It includes the Statement Balance, Minimum Due, and Due Date.
  • Minimum Due – Minimum amount you must pay your credit card company by the Due Date to keep your account in good standing, even though you really owe the Statement Balance.
  • Due Date – The date, usually about 25 days after the Statement Closing Date, when a payment is due. For most cards, the Due Date is the same day of the month every month. Sometimes this is based on when you opened the card, but some issuers allow you to choose a different date on which your bill will be due each month.
  • Next Statement Closing Date – The new statement closing date for this current statement period that started after the previous Statement Closing Date on July 1.

The Minimum Due is calculated based on your Statement Balance according to the terms of your card. For this example card, we assume the terms are:

Minimum Due is calculated as 2% of the Statement Balance rounded down to the nearest $1. When the Statement Balance is above $15, the Minimum Due will be no less than $15.

The way credit card minimum payments are structured can be complicated and vary from card to card. The structure of a minimum threshold amount (like $15 or $25) for the Minimum Due that rounds to the nearest dollar or $5 is common. Since 2% of the $600 Statement Balance is $12, but the terms of this card say the minimum will never be less than $15 when the Statement Balance is above $15, the Minimum Due amount in this example is $15.

Credit History Impact

Nothing is reported to credit bureaus as a result of this event (the Statement Balance was already reported on the Statement Closing Date).

Make a $200 Purchase – July 15

Important Numbers

  • Current Balance: $800
  • Statement Balance: $600
Your Current Balance has increased by $200 to reflect how much you currently owe the credit card company. Your Statement Balance is the same as it was on the previous Statement, and won’t change until the next Statement Closing Date.

Credit History Impact

Nothing is reported as a result of this event.

Pay $500 on Due Date – July 25

Important Numbers

  • Current Balance: $300
  • Statement Balance: $600

Since this statement period has not closed yet, the Current Balance becomes $300 (to reflect your $500 payment) and the Statement Balance remains $600, because that’s what you owed when the Statement for this previous period was generated. If you don’t pay at least the Minimum Due by the Due Date, your payment may be considered late or missed, which can have a HUGE negative impact on your credit scores. Many issuers will wait until a payment is at least 30 days late to report it to credit bureaus. Even if the issuer waits 30 days to report the late payment to credit bureaus they may charge you a late payment fee, increase your APR to a penalty rate, or both.

It may look like the issuer is asking you to pay the Minimum Due. Unlike in this example, you should pay the full Statement Balance by the Due Date. With most cards, you will pay interest (lots of extra money) to the credit card company if you pay less than the full Statement Balance you owe.

When it comes time to pay your bills, keep in mind that you can easily avoid interest by simply paying off your entire account balance by the due date. This will help save you money and it’s good for your credit score.

Credit History Impact

If you pay less than the Minimum Due by the Due Date, you risk a missed or late payment being reported to the credit bureaus, which can have a big negative impact on your credit scores.

Statement Closing Date – August 1

Important Numbers

  • Current Balance: $301.67
  • Statement Balance: $301.67
  • Interest Charged: $1.67
  • Minimum Due: $15
  • Due Date: September 7

New Terms

  • Interest Charged – Fees charged by the issuer on debt you did not pay during the previous statement period.

The $600 previous Statement Balance – $500 Payments = $100 remaining unpaid Statement Balance, so interest gets charged on that $100. Assuming 20% APR, the Interest Charged is approximately $1.67. This gets added to the $300 Current Balance, so the new Statement Balance is $301.67 and will be reported to the credit bureaus.

The new Minimum Due is $15. Since the terms of this card say that when the Statement Balance is above $15 the the Minimum Due is 2% of Statement Balance with a minimum of $15. 2% of the Statement Balance is $6.03, but since that’s less than $15 and more than $15 is owed, the Minimum Due is $15.

Credit History Impact

The new Statement Balance will be reported to the credit bureaus. Your issuer may periodically change the Credit Limit of your account. If your Credit Limit changes, your new Credit Limit will also be reported to the credit bureaus. Remember, your Credit Limit and Statement Balance are important factors that impact your revolving credit utilization, a major component of credit scores.

And the cycle continues! Make sure you pay your card in full, on time, every month!

If you have any questions about anything discussed on this page, please contact us and ask them.

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