Your credit card has several different amounts that you can pay. Which one you choose has a big impact on how much interest you are charged – or whether you have to pay interest at all.
For people new to credit cards, paying the bill can be more confusing than expected. When you log into your online account and go to the payment page, there will be three amount options: minimum balance, statement balance, and current balance. Or, you can choose to pay a custom amount.
The best approach is to pay your current statement or balance. If you do, the card issuer will not add any credit card interest. Paying the minimum is not recommended unless that’s all you can manage. To understand why, it helps to know how each of these payment options works.
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The minimum payment is the minimum amount to stay current on your credit card bill. Each card issuer has their own formula for calculating it. This is usually 1% to 2% of the total card balance with a fixed minimum, such as $ 25 or $ 35.
If you do not pay at least the minimum by the due date, this is considered a missed payment. For example, if your minimum card payment is $ 50 and you pay $ 25, the card issuer may still charge you late fees.
The cost of only making minimum payments is that it doesn’t affect your total balance much. It can take a long time to pay off your card when you pay the minimum, and during that time the card issuer will charge interest. If you use your credit card regularly and pay only the minimum, the balance may also continue to rise, putting you in more debt.
The statement balance is the credit card balance at the end of the last billing cycle. It includes all transactions unpaid on that date. If your card’s billing cycle ends on the 25th of each month, the statement balance is the balance on the 25th.
When you pay the statement balance on the due date, the card issuer does not charge you any interest on your purchases. For this reason, it is good practice to make a habit of paying the entire statement balance each month. This allows you to use your credit card for interest-free purchases.
Note that the interest-free period does not apply to credit card cash advances. Credit card companies immediately charge interest on cash advances. These transactions also usually have a higher interest rate and additional fees, which is why you should try to avoid this type of transaction.
The current balance is the credit card balance at that time. It includes all unpaid transactions except recent transactions which are still pending. Unlike the statement balance, it also includes transactions made since the last billing cycle was closed.
Here is an example to explain the difference. Let’s say your credit card billing cycle ended with a balance of $ 1,000. Since then you have spent an additional $ 100. The statement balance would be $ 1,000 and the current balance would be $ 1,100.
You can avoid interest by paying either the statement or the current balance. If you pay the statement balance, all unpaid transactions will be posted to your next credit card bill. But you might want to go with the current balance if your card has a low credit limit. By paying off the current balance, you’ll bring your card balance down to $ 0 and free up more of your credit for the next month.
How much do you have to pay on your credit card bill?
Try to pay your credit card statement balance or the current balance each month. When you do, you can enjoy all the benefits of the best credit cards without any interest charges.
If you can’t do it, pay as much as you can. You don’t completely avoid interest this way, but at least pay off your balance as much as possible.
Look at the minimum payment as the emergency option. If money is tight, you may have to pay the minimum. This keeps you from having missed payments on your credit history. Just make sure that you are focusing on paying off the balance to zero to get rid of credit card debt as quickly as possible.