Paying your credit card can be done in a number of different ways. You can pay the full balance, make the minimum payment, etc. It’s probably one of the few bills you receive which isn’t due in full. Still there are reasons why you should follow certain behaviors over others.
Understanding the Credit Card Billing Cycle
On a monthly basis, you will receive a credit card statement by mail or your online account. This billing statement will usually be available online about a day after your billing cycle closes. The billing cycle for a credit card can vary by the bank who issues it. Generally you can expect the billing cycle to be between 28 days to 32 days.
Your billing statement includes information like your beginning balance (the amount that you carried over from the last month), charges, payments, credits and fees that have all occurred during your billing cycle. All your payments and credits are deducted from charges and fees to give you the current balance.
There is a minimum, statement, and current balance that are all part of your billing statement. Let’s dig deeper into what each of them mean.
What is the Minimum Balance?
This is also sometimes called the minimum payment amount. This is the minimum amount that your credit card issuer will accept to keep your account in good standing. You could be charged a late fee or assessed a penalty interest rate charge if you don’t at least pay the minimum balance.
If the credit card issuer reports it as a delinquency then it could also hurt your credit score. Issuers don’t usually report a missed payment until it’s 30 days late or more.
You should always try to pay more than the minimum balance on your billing statement. Ideally, you should pay the entire balance that’s due. Otherwise the balance that remains will accrue interest, costing you more money.
If you continue to pay only the minimum balance, your credit card balance can grow to be larger than you can control. Paying only the minimum balance will also cause increases in the minimum amount due from month to month.
In the event that you have financial problems and can’t afford to pay your full balance, then at least cover the minimum balance amount. That will keep you from the possibility of hurting your credit and minimize extra fees and penalties.
Making only a payment towards a minimum balance should be your last resort. It’s the only option that’s better than not paying your credit card at all. If this is a circumstance that you find yourself in often, it’s time to do a deeper drive in your finances to come up with a long-term strategy.
What is the Statement Balance?
All of the charges that you made during the last billing cycle and your outstanding balance (amount that was already on the account) is your statement balance. When you pay your statement balance, it wipes the total balance that you have, aside from any charges incurred during the beginning of your current bill cycle. This is also known as “paying in full”.
When you pay the statement balance, you will not accrue interest on your purchases from the last billing cycle. The time between the end of the billing cycle and due date is called the grace period.
Without question, paying your statement balance is ideal for you. It allows you to enjoy the convenience of paying with a credit card without the potential of additional charges like interest.
To pay your statement balance off each month you should only use it to make purchases that you can afford to pay back every month. You can also set up auto-pay on your credit card to prevent the risk of forgetting to make your payment by the due date. This feature will automatically take out the amount of your statement balance from your linked bank account.
What is the Current Balance?
The current balance is made up of all the charges to date that hasn’t been paid. Any pending charges that haven’t been cleared yet won’t show up in your current balance. It’s the most up-to-date balance on your credit card.
Here’s an example of this: You are in the 10th day of your current billing cycle. There are $50 in purchases that have been made plus a $20 balance that was leftover from your last bill cycle. The current balance of your account is $70.
Like paying your statement balance, this is a good way to manage your credit card. Paying your current balance avoids interest charges and brings your credit card balance to zero up to your payment date. Good budgeting and careful spending habits are needed to have enough money to cover your current balance.
Which Balance Should You Pay on Your Credit Card?
Ideally, you should pay the current balance on your credit card whenever possible. This keeps you on top of the purchases that you are making on your credit card. Try to think of your credit card as a debit card where you can only use it if you have enough money in your account and can pay it off as soon as the charge appears.
The next best scenario is that you pay off the statement balance. You are keeping up with your payments and not incurring interest charges. Be aware of what your current balance minus your statement balance is to ensure that you aren’t going to end up spending more than you can afford to pay next month.
As previously discussed and worth emphasizing, making payments of only the minimum balance should be avoided. Here’s an example of how much is costs to pay the minimum balance of a credit card:
Your statement balance is $1500 with an interest rate of 19% . You are required to make at least a 3% minimum payment on the balance, that comes to $45. It will take you 48 months to pay off the original $1500 (this doesn’t include additional purchases you might make afterwards) and cost $649.27 in interest.
The interest that you end up paying in this example is almost half of the statement balance! This is a lot of extra money that is basically burned for nothing.
3 Tips to Make Your Payments on Time
To build and maintain a good credit history and score, your payment history is one of the key factors. Since payment history is a component of your credit score, making one missed payment could lower it.
Life has many responsibilities such as kids, work, being a caregiver for elderly parents, and so much more. Keeping up with your credit card due dates is probably not going to be top of mind. You need tactics that you can use to keep from missing a payment.
1. Get set up with autopay
Linking up your bank account to use for your credit card bill with autopay will make the whole process automated. You will still want to check in with your statement or current balance to make sure that you can cover the bill.
2. Turn on text and/or email alerts
This allows you to get notifications of when your credit card due date is coming. Many issuers also offer alerts when you make a purchase, if your balance reaches a certain threshold, to confirm a purchase, and more. Consider turning on these alerts to improve the management of your credit card.
3. Request the same due date for all of your accounts
When you are managing multiple credit cards, it can be easier to remember one due date over five. To make this request, you can usually do it online or by calling your issuer’s customer service number.
How Soon Should You Pay Your Credit Card Bill?
It’s important to understand what credit utilization is when you are trying to decide on when to pay your credit card bill. Credit utilization takes your outstanding credit card balances and divides it by your credit card limit. It is the percentage of available credit that you are using.
For example, let’s say you have a balance of $400 on your credit card which has a credit limit of $1,000. Your credit utilization is 40% for that credit card. Now if you have three credit cards, you can also calculate your total credit utilization. If the total balance between the three credit cards is $1000 and total credit limit is $2,000, then your total credit utilization is 50%.
Your credit utilization is one of the five major factors that includes your FICO credit score. It is weighted at 30% which means that it is one of the heaviest influencers. A lower balance relative to your credit limit is better for your credit score.
The balance that is reported to the credit bureau is your statement balance which is all the charges over the last bill cycle. You should check with your issuer to find out the exact timing, especially if you have multiple credit cards.
Making payments or paying off your balance by the end of your bill cycle will lower your credit utilization. If you have multiple credit cards, this strategy is helpful in spreading your payments and keeping your bank account more level through the month as you receive your paychecks.
Is it Better to Pay Off a Credit Card in Full?
Paying your credit card in full will show lenders that you are a responsible borrower. It will also have a positive impact on your credit score so that when you need to lend money to purchase a home for example, it will improve your chances of being approved and getting a lower interest rate.
For these reasons, your goal should be to pay your credit card balance in full by the due date. You can make one lump sum payment to do this if this works better for managing your finances. But remember the benefit of making multiple payments and how you can use this method to pay your balance in full before the end of the bill cycle.
If you are looking for ways to improve your credit score, multiple payments will have a positive impact to help reach your goal. Or you might be planning a big purchase that will utilize a large portion of your credit limit that you want to have space for.
Understanding how paying your credit card bill has an impact on your credit will help you come up with a solid financial strategy. Ideally you will pay off your credit card in full each month to get the most positive results. Setting up autopay, text/email alerts, etc. will help make paying your bill on time more seamless.