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 company. 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 important factors in calculating a person’s credit score. Future creditors look at them to determine the risk (and cost) of granting their customers 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, which can decrease your credit score.
- A credit card balance shouldn't be confused with a statement balance, which is the amount printed on the statement by your card issuer.
Understanding Credit Card Balances
Credit cards are payment cards that allow individuals and business owners to make purchases without having to immediately fork over any cash. They give cardholders the chance to pay for their goods and services later while providing them with a secure and safer method to shop. Unlike cash, credit cards are generally accepted worldwide and may offer incentives 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 each month based on how you use your card. It is made up of different 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
New credit card balances are commonly updated anywhere from 24 to 72 hours once a purchase or payment is processed. The length of time depends on the credit card company and how the transaction was executed.
Special Considerations
Paying Down Your Balance
The best approach to managing your credit card (and, therefore, your credit) effectively is to pay your balance off in full. A zero balance helps avoid the interest charges associated with maintaining a balance. If you have no other option, try paying more than the minimum monthly payment, as this knocks off more of the balance and accumulates less interest that you'll owe to the card issuer.
But sometimes, it’s just not that simple. You may find yourself in a situation where you can only make the minimum payment. If you do that, know that it will take a long time to pay off the balance. Although you'll pay more in interest, you won't damage your credit score.You can keep your credit score intact or improve it by paying the bill before the card issuer reports to the credit reporting agency. Doing so ensures that there's a lower balance reported to the credit bureaus each month.
If you’re having trouble fully paying off your credit card balance each month, then it may be worth switching to a balance transfer credit card to secure a lower interest rate.
Balances and Credit Scores
Carrying a credit card balance generally isn’t a good idea because it can affect your credit score. Revolving credit (credit cards and lines of credit) factors into your credit utilization ratio, which is the total amount of credit you use at a particular time divided by the total amount you have available or the sum of all your credit limits. It's a good idea to have a ratio of under 30%.
If you have a credit limit of $5,000 and keep a balance of $4,000 on your credit card, then your credit utilization is 80%, which is extremely high. This tells creditors that you aren’t responsible. As such, you may be deemed high risk for defaulting on any future debt. So the chances of getting a new loan or credit card may be slim. If you keep your ratio down, it suggests that you're better able to manage credit responsibly.
Talk to your credit card company to see if you qualify for an automatic increase of your credit limit. This can effectively drop your credit utilization ratio down. But keep in mind that your card issuer may have to pull a hard inquiry if you don't, which means your score may drop as a result.
Credit Card Balance vs. Statement Balance
Your credit card balance is the total that you owe today. As such, it's also called your current balance. This figure is different from your statement balance, which is the amount that is reflected on your bill. This figure is calculated at the end of the billing cycle (up to the closing date) and printed on your bill. You will see this noted as the new balance on the statement.
To keep your credit card in good standing, pay this amount or the minimum payment listed on the statement. If you pay off the statement balance each month, you avoid paying interest on your purchases altogether. The statement balance does not include any charges incurred or payments made on the credit card after the statement closing date.