The recurring advice when it comes to paying off your credit card is “always pay your statement balance off in full.” And while that should continue to be the norm, there’s more to it. Your statement balance is one of two amounts you should monitor, the other being your current balance. While your statement balance is a number confined within a time window that locks after that window closes, your current balance is a number – which may or may not be equal to your statement balance – that is not constrained by any period. Both types of balances play an important role in shaping your credit history, and both should be kept as close to $0 as often as possible.
What is a Statement Balance?
As long as you have a credit card account open, your activity will be divided into monthly billing periods (Note that these periods do not start on the first of the month; the exact dates are set by the institution that issues your credit card). Any transactions that take place during each billing period will make up your statement balance. Once a billing period ends, your statement balance is locked and becomes the amount you are responsible for paying for that particular period. After the billing period’s closing date, you’ll usually have a grace period of at least 21 days to pay off your statement balance. If you pay it off in full, you’ll avoid finance charges like interest and late fees. This is the routine you should religiously adopt in order avoid paying more money and to maintain a pristine credit history. If you are unable to pay off your full statement balance, the remaining amount will be added on to the following billing period’s statement balance. You should prevent this from happening because it will mean potentially higher interest charges and mounting debt that will become harder to erase.
What is a Current Balance?
Current balance is the amount you owe on your credit card in real time. In other words, it is your most recently updated balance every time you see it. Any time a transaction occurs, your current balance changes. For example, if your statement balance for the previous billing period is $500, and you have not made any other payments or purchases with your card, your current balance is also $500. If you paid off $200 from your $500 statement balance, your current balance is $300. If you completely paid off your statement balance and have not made any other payments or purchases with your card, both your statement and current balances are $0. Your current balance is not subject to interest charges until it becomes part of your statement balance and you have not paid it off completely by its due date. For this reason, while it’s crucial to keep your statement balance each period at $0, it’s also smart to keep your current balance as close to $0 as you can. Doing so frees up your total line of available credit and it keeps your credit utilization ratio low. Plus, if you allow both your statement and current balance to sit untouched, you will have a bigger mountain to climb by your next due date. Although your current balance includes your most recent transactions, it may not take into account pending charges or payments. If you dined at a restaurant, left a tip on your bill, and check your balance the following day, you will see the sub-total of the restaurant bill included in the current balance, but your tip may not be added on until perhaps a day later. You can either add up the pending charges or wait a bit more to see the current balance reflect the true amount of money you spent.
How to Avoid Paying Interest
Credit card APRs can add a painful sting to your statement balances if they’re not fully paid off by their due date. In addition, your credit report will show that you leave outstanding balances, which hurts your chances of being approved for further lines of credit or loans in the future. Plus, your credit score can also suffer. These reasons alone are enough to compel you to fully pay off your statement balance each billing period. Try not to charge more than you can afford on your credit card. If you can, make multiple payments to your statement balance throughout each billing period; don’t just wait until the due date. If you’re not able to pay off your full statement balance, at least make the minimum payment posted on your credit card statement. You will be charged interest on the remaining balance, but at least you won’t have to deal with late fees. Also, many issuers give customers the option to set up automatic payments, which can help you chip down your balance multiple times each month. However, make sure you’ll always have sufficient funds in your bank account. Credit card issuers will charge a returned payment fee if you pay more than what you actually have. Unfortunately, it’s not always possible to escape interest charges. In the case of cash advances, there is no grace period as with regular purchases, which means you will be charged interest on it as soon as you receive it. If you resort to a cash advance, try to pay it off as soon as possible. Cash advances also tend to have higher APRs than regular purchases or balance transfers, so you would potentially end up paying more over the long run. Plus, if you have purchases already making up part of your statement balance, any payments you make will be applied to the amount with the lowest interest rate first, meaning you’ll be chipping away at the purchases before the cash advance.
How Your Credit Utilization Ratio is Affected
As you’ve read, paying off your statement balance in full to avoid finance charges is one thing, while paying off your current balance to keep your credit utilization ratio low is another. Maintaining both as close to 0 as possible is always a good thing. Anyone who checks your credit history will see that you can pay off what you borrow, and you don’t borrow too much. Credit card issuers typically report statement balances to the three major credit bureaus, but others may report current balances as of a specific day of the month instead. Therefore, if you pay off your statement balance in full but then proceed to make a large purchase that takes up a big chunk of your credit limit, your utilization ratio will be high and that won’t look good on your credit report nor your credit score (which places high importance on your ratio). If you’re not sure which figure your card issuer reports, you can call the number on the back of your card to confirm.