Understanding Credit Card Balances and What's Included

What Is a Credit Card Balance?

A credit card balance represents the debt owed to a credit card company by cardholders who make purchases using their cards. The balance increases with purchases and decreases with payments. In addition to purchases, balance transfers, fees, and interest all can increase a credit card balance.

Cardholders should understand that their credit card balance will affect their credit score and credit utilization ratio. So it's important to pay off the balance as quickly as possible not only to avoid interest charges but to maintain a healthy credit score, as well.

How Credit Card Balances Are Calculated

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 comprises various elements, such as:

• 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 key to managing your credit card balance, and it's wise to pay off your statement balance in full before the due date. If you make only the minimum payment, the remaining balance rolls over into the next billing cycle. You incur interest on whatever remains, which is reflected on your next statement.

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.

Important Considerations for Managing Your Credit Card Balance

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 you avoid interest charges. 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 maintain or improve your credit score by paying your bill before the issuer reports your account status to credit agencies. Doing so ensures that there's a lower balance reported 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.

The Impact of Credit Card Balances on Your Credit Score

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%.

With a $5,000 credit limit and a $4,000 balance, your credit utilization is 80%, which is very 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.

Keeping a high credit card balance can make you financially vulnerable in other ways, too. You won't be able to use your card in an emergency if you maintain a high balance, especially if it's too close to your credit limit. You're at risk of extra interest charges or late fees if your debt grows beyond your ability to pay.

Differences Between Your Credit Card Balance and 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.

The Bottom Line

A credit card balance is the total amount owed to the credit card issuer by a cardholder. It includes purchases, interest, and fees. Managing your credit card balance is crucial for maintaining a healthy credit score and controlling your credit utilization ratio. If you can, be sure to pay off your card balance in full every month, or the statement balance, or more than the minimum payment to avoid or restrict interest rate charges.