I had a hairdresser once who told me she used a credit card. Used it often. But she admitted one day that she didn't know what a credit card balance was or how to leverage a balance transfer offer to pay down debt.
I don't know why, but I've been thinking of her a lot lately. And with the holidays just around the corner, and everyone financially reeling from the COVID-19 shutdown, I wanted to go over in detail everything you need to know about credit card balances.
So you can shop credit – smart this year and save your pennies where you can.
What is a Credit Card Balance?
Your credit card balance is the amount you carry on your credit card at any given time.
Why Do You Need to Know Your Credit Card Balance?
Not knowing your credit card balance can lead to a nasty surprise when it’s time to pay the bill.
On the flip side, knowing what you owe allows you to budget out your finances, and make a plan for paying it down.
When you keep an eye on your credit card balance, it also helps you monitor spending. Credit cards make it easier than ever to buy things we can’t actually afford.
If you’re spending more than your income supports, monitoring your monthly balance will give you a heads up before it becomes a serious problem.
Being aware also helps you avoid interest charges. If you pay off your cards every month, you won’t have to worry about interest building up and draining your finances. Sometimes, the only way to avoid interest charges is to keep a close eye on what you spend. When you’re careful with your spending, it’s easier to stick to your budget and keep your recurring balance at zero.
Finally, knowing what your balance helps keep your credit utilization low. Credit utilization is how much you owe then divided by your current credit limit. Your credit utilization score is important because it shows you’re using less of the credit you have available. This is factored into your credit score, as it shows you’re managing your credit by not overspending.
Where Can You Find Your Credit Card Balance?
Banks and credit unions make it easy to check your balance at any time. You can login to the financial provider’s website, or use their mobile app to check your balance on the go.
If you don’t have an account set up, you’ll need to create one. Most websites are good at helping you create one, and walk you through the process.
Once you have an account and login, you can check your current balance and past statements.
Many institutions will send out physical copies of your credit card statement each month. If you signed up to get bills in the mail (hello 1995), you simply have to wait for it to arrive in your mailbox. You can also opt for e-statements to be sent to your email securely.
Should all else fail, you can always call the number on the back of your card for assistance.
What Happens When You Carry a Balance on Your Credit Card?
If you can avoid carrying a balance on your credit card, your credit score will thank you. Whatever amount is left on your card will carry over to the next billing cycle (and the next) until the balance is gone.
Credit card interest is usually fairly high, so you can rack up interest fees quickly depending on the terms of your card.
Keeping a balance on your card for long periods of time will usually increase your credit utilization. In turn, this will hurt your credit score.
Almost half of Americans carry credit card debt. But that doesn’t make it a good idea. The more you get in debt, the harder it is to get out of it. The longer you carry a balance on one or more credit cards, the harder it’ll be for you to get out of the debt hole.
How does a credit card balance accrue interest?
So – fun fact – if you carry a balance, you're charged interest on that balance daily. Here's a quick-and-dirty example of how your credit card costs you money in interest if you carry a balance.
- To get to your daily interest rate you divide the APR (20%) by 365 (the number of days in a year.
- That's .054% per day or roughly, about a nickel in daily interest.
- But then the next day, you're charged that .054% on $100.05.
- And this is how interest compounds and people can get into trouble. Not at $100. But imagine if it's $1,000 balance, or $10,000.
Here's a simple daily periodic rate calculator if you want to see how much interest you are paying on any balance you hold over from month to month.
What is the Remaining Statement Balance?
The remaining statement balance reflects your most recent balance after it’s been adjusted for any of the following:
- Applicable credits
- Returned payments
The amount on your remaining statement balance should be paid off whenever possible. Doing this means you’ll avoid interest charges.
What’s the Difference Between Credit Card Statement Balance and Current Balance?
A credit card balance is what you owe the credit card company during any given month. On the other hand, your statement balance refers to what you owe each billing cycle. It also includes a minimum monthly payment.
- In other words, the current balance is the amount you have on your card overall.
- Whereas the statement balance is what you owe that month.
- Your minimum payment isn’t quite the same as your statement balance. Instead, it’s the minimum amount you have to pay left on your balance for your account to be considered in good standing. Usually, this amount is smaller than the overall statement balance.
If you want to avoid paying interest, you should pay the statement balance in full. Any unpaid portion of statement balance will start to accrue daily interest after your payment due date.
What Happens If You Pay Your Credit Card Bill Before You Get a Statement?
In most cases, your financial institution shouldn’t punish you for paying your credit card bill early.
When you have an online account, this shouldn’t be a problem. Most online accounts are updated daily, and tend to be more accurate in showing you what your balance currently reflects.
However, if you’re worried about possible consequences of paying your credit card bill early, you should check the terms of your card. This information should also be available on your bank’s website.
Making an early payment reduces the balance your card issuer reports to any relevant credit bureaus. In turn, it lowers your credit utilization, which improves your credit score for that month. In other words, any time you can pay off your credit card early, do it!
Even if you can’t pay off your entire credit card, your history of paying on time and the amount of time your accounts have been open will help you in building a positive credit score.
Best Practices for Keeping a Low Balance on Your Credit Card
Before you can start working on keeping a low balance on your credit card, you’ll need to know how much you owe at any given time.
If you have a big credit card bill, know that it isn’t going to go away all at once. However, you can work to make new habits that will eventually get your credit card to having a low balance each month. (Here's how I paid off an $8,000 balance in 90 days.)
But really, keeping a low balance comes down to the following helpful habits.
The first step you’ll need to take when it comes to getting that low number is to decrease the amount you use your credit card each month.
If you have your card on auto-fill online, take it off. Make it harder to reach your card so you don’t find yourself automatically reaching for it whenever you’re tempted to buy something.
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Pay your bill with each purchase
Another step you can take to keep your balance at or near zero is to pay your bill every time you buy something.
- If you’ve gone to the grocery store, consider pulling up your app and putting the amount you spent from your checking into your credit account.
- Create a way to track your spending so it can help remind you to pay your bill as soon as possible.
- Here are my favorite money-saving apps for everything from saving on groceries to budgeting and saving on the go.
Pay off your card every month
Even if you don’t pay off your card with each purchase, it’s smart to plan on paying it completely down every month. Make a plan to pay your card off before the due date and work that into your budget schedule.
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Pay more than the minimum payment
For those who owe more than what you can pay all at once, you can still make progress! The best thing you can do is to pay more than the minimum payment.
Figure out the largest number you can put towards debt, and then put that towards your card each month. You’ll want to do this even when the minimum payment keeps shrinking. Having a regular amount you can put towards debt is a great way to decrease the amount you’ll be paying in interest each month.
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Consider using a personal loan
If you’re really far in debt, it might seem like paying off your credit card is years away. If that’s the case, then consider using a personal loan.
I don't recommend this lightly and it should only be used IF the interest rate is advantageous and IF you can commit to cutting up your cards and not using them – for good.
But here's why – most personal loans have better terms than any credit card you could use.
While a personal loan is still a type of debt, overall, you’ll be spending less money with your personal loan than you will with your credit card. With lower interest rates, you’ll be able to pay it off sooner, and therefore have less of your credit utilization.
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Get a side hustle
Sometimes the only way to pay down your credit card is to increase the amount of money you can put towards it. If you’re capped out at the amount you can make at your full-time job, working a side hustle is a great way for you to bring in some extra cash.
There are plenty of side hustles you can take on while working a full-time job. Meal delivery, pet sitting, and starting a blog are all great ways to bring in extra money to help you get your balance to zero.
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