What is a Credit Card Balance?
A credit card balance is the total amount of money currently owed by a cardholder to their credit card issuer. Balances change based on when and how they are used—they increase when purchases are made and decrease when cardholders make payments. Any remaining balance at the end of the billing cycle is carried over to the next month’s bill and incurs an interest charge. Credit card balances are significant factors in calculating a person’s credit score, and future creditors examine them to determine the risk and cost of granting additional credit.
Key Takeaways
- A credit card balance is the total amount of money that you currently owe on your credit card.
- The balance increases when purchases are made and decreases when payments are made.
- Purchases, balance transfers, foreign exchange, fees, and interest all factor into your credit card balance.
- Credit card balances can increase your credit utilization ratio, negatively affecting your credit score.
- The credit card balance shouldn’t be confused with the statement balance, which is the amount reflected on the statement by your card issuer.
Decoding Credit Card Balances
Credit cards allow individuals and business owners to make purchases without needing to pay immediately, providing a secure and convenient method of shopping. They are typically accepted worldwide and can offer benefits like points or cashback.
The balance on your credit card is the total amount of money you owe to your credit card issuer. This amount changes monthly based on your card usage and factors including:
- Purchases
- Balance transfers
- Foreign exchange
- Fees such as late payment charges, returned payment charges, and Forex and balance transfer fees
- Annual fees and cash advance fees
- Interest charges
Payments are also essential components of your credit card balance. It’s always advisable to pay off your statement balance in full before the due date. If you only make the minimum payment, the remaining balance rolls over into the next billing cycle, incurring interest.
Credit card balances are typically updated within 24 to 72 hours once a transaction is processed, depending on the issuer.
If you return an item purchased with your credit card, the refund will appear in your credit card balance. Refund times vary but usually take from a few days to 15 days to reflect in your account.
Special Considerations
Paying Down Your Balance
The best approach to managing your credit card and credit effectively is to pay off your balance in full. A zero balance helps avoid the interest charges associated with maintaining a balance. If you can’t pay in full, paying more than the minimum monthly payment can help reduce the balance faster and lower interest accumulation.
However, sometimes circumstances only allow for minimum payments. While this means it will take longer to pay off the balance and result in higher interest payments, it won’t damage your credit score if done consistently.
Maintaining a good credit score can be achieved by paying your bill before the card issuer reports to the credit reporting agency, ensuring a lower balance is reported every month.
If difficulties arise in paying off your credit card balance, consider a balance transfer credit card to secure a lower interest rate.
Balances and Credit Scores
Maintaining a credit card balance is generally inadvisable as it can impact your credit score negatively. Revolving credit factors into your credit utilization ratio, a measure comparing used credit to available credit. Keeping this ratio below 30%—the threshold commonly deemed appropriate—indicates responsible credit management.
For instance, with a credit limit of $5,000 and a $4,000 balance, the credit utilization is 80%, which is excessively high and may be unfavorable to creditors. High credit utilization marks cardholders as high risk for defaulting on future debt.
High credit card balances also restrict the card’s emergency utility and increase the risk of accruing additional interest and late fees. Discuss with your card issuer the possibility of increasing your credit limit to help lower your utilization ratio.
Credit Card Balance vs. Statement Balance
The total amount owed today on your credit card is your credit card balance, also known as your current balance. This differs from the statement balance, which is the amount shown on your bill calculated at the end of the billing cycle (up to the closing date).
For good standing, you should pay the statement balance or at least the minimum payment listed on the statement. Paying the statement balance in full each month can help you avoid interest charges on your purchases. The statement balance does not account for charges or payments made after the statement closing date.
By staying on top of these balances and managing payment timing wisely, you can maintain or improve your financial health effectively.
Related Terms: Credit Utilization Ratio, Statement Balance, Minimum Payment, Credit Limit, Interest Rates.
