Definition and types of credit card balances
What is a credit card balance?
A credit card balance is the total amount of money you owe to the credit card issuer. It includes purchases, cash advances, balance transfers, fees, and any accrued interest.
Your credit card balance fluctuates based on your card usage and payments. Understanding your credit card balance is crucial for managing your finances, avoiding excessive debt, and maintaining a good credit score.
Different types of credit card balances
There are three types of balance to know: statement balance, current balance, and available balance.
The statement balance is the amount owed at the end of a billing cycle, while the current balance includes all transactions up to the present moment. Available balance indicates how much credit you can still use before reaching your credit limit.
Knowing the difference helps in making timely payments and avoiding interest charges.
How balances accumulate on credit cards
Purchases represent the core of most credit card balances, but buying goods and services isn't the only way to accumulate a balance. Interest, fees, and cash advances also increase your credit balance.
Some cardholders use balance transfers to get an intro 0% APR offer and save on interest, but that move also results in a balance transfer fee. If you incur that fee, you will end up with a higher balance on your credit card.
A higher current balance will reduce your available balance and push you closer to your credit limit.
How credit card balances affect credit scores and finances
Credit utilization ratio and its importance
This metric measures the percentage of available credit you have already used. For instance, if you have a $5,000 credit limit and have borrowed $1,000 against your card, you have a 20% credit utilization ratio.
A credit utilization ratio below 30% is good for your credit score, and it's ideal to get it below 10%. A credit utilization ratio above 30% will hurt your credit score. You can only reduce your credit utilization ratio by paying off debt or getting a higher credit limit.
Impact of high balances on credit scores
A high balance will bring down your credit score because it generally corresponds with a high credit utilization ratio, but that's not the only factor that can hurt your score. A higher balance makes it more likely for a cardholder to make late payments. Since payment history makes up 35% of your FICO score, a single late payment can have a significant and negative impact on your credit score.
Interest and balances: how debt accrues
Debt accrues with each purchase, and interest rates compound it. If you let your balance get too high, interest payments can make it impossible to make meaningful use of the principal.
The average credit card interest rate is almost 21%, and some cards have APRs above 30%. At a 30% APR, a $10,000 balance turns into $13,000 in one year if it remains unaddressed. That doesn't even include any additional purchases a cardholder may make.
It's best to pay off your balance at the end of each month to avoid interest charges and avoid spending more than you can repay.
Tips for managing and reducing credit card debt
Paying off your balance in full vs. minimum payments
It's better to pay off your credit card balance in full each month, even though you won't get penalized with a late fee for only making the minimum payment. The issue with stopping at the minimum is that interest accumulates on the remaining balance. Only making the minimum payment can also result in a bad habit that leads to a large balance within a few years.
Strategies to pay down credit card debt
Balance transfers are a good place to start for most people who have high credit card debt. Paying 0% APR for 12-21 months can be a game changer as long as you prioritize making more than the minimum monthly payment so you're able to pay off the full balance by the end of the introductory period.
Depending on the nature of the debt, you may have to pick up a side hustle or look for ways to advance in your career. If you haven't tracked your expenses yet, doing so can reveal plenty of ways to save. For instance, you can find free entertainment options at the library instead of using a streaming service. Using one of the best budgeting apps is a great way to start getting a handle on your expenses.
Setting up automatic payments and budgeting
Automatic payments ensure that you make some progress with your credit card debt each month. You can also move the funds out of your checking account before you think of a way to spend them.
You can combine automatic payments with budgeting so you move over the right amount of cash each month. Creating a budget can also help you detect unnecessary expenses and cut them out in the process. The great thing about removing expenses is that your credit card balance won't grow as much, and you'll have extra money to pay off debt.
Common terms related to credit card balances
Statement balance vs. current balance
Statement balance refers to the balance you had at the end of the most recent cycle. Meanwhile, the current balance shows how much credit card debt you currently have.
Minimum payment
The minimum payment indicates how much you have to pay the credit card issuer to avoid getting reported for a late or missing payment. This payment also keeps your credit card in good standing, but interest still accumulates on the remaining balance.
Grace periods and interest rates
The grace period is how much time you have after the credit card statement concludes to pay off your balance without incurring interest. After the grace period concludes, any remaining balance from the previous statement accumulates interest.
FAQs about credit card balances
What is the difference between a credit card statement balance and a current balance?
A credit card statement balance shows your credit card balance at the end of the statement, while your current balance shows you how much you owe right now.
Does carrying a credit card balance help build credit?
While carrying a small balance won't necessarily harm your credit score, consistently carrying a large balance can lead to high interest charges and negatively impact your credit score.
What is a good credit card balance to keep?
A $0 credit card balance is perfect, but you cap your balance at 30% of your credit limit to avoid damaging your credit score. Your score will go higher if your balance is less than 10% of your credit limit.
How can I reduce my credit card balance quickly?
To quickly reduce your credit card balance, make more than the minimum payment each month, prioritize paying off high-interest cards first, and consider a balance transfer card with a lower interest rate.
What happens if I don't pay my credit card balance in full?
If you do not pay your credit card balance in full, it will accumulate interest. If your balance gets too high, it can have a negative impact on your credit score.
Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer. Read our editorial standards.
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