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?
- How does a credit card balance accrue interest?
- What happens when you carry a balance on your credit card?
- What is the remaining statement balance?
- What’s the difference between a credit card statement balance and a current balance?
- What happens if you pay your credit card before you get a statement?
- How does a credit card balance transfer work?
- Do credit card balance transfers affect your credit score?
- Should I pay off credit card balances with the highest amount or highest interest rates first?
- Is it a good idea to do a balance transfer?
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Your credit card balance is the total amount you carry on your credit card at any given time.
Banks and credit unions make it easy to check your balance. You can log in to the financial provider’s website, or use their mobile app to check your balance on the go. Once you have an account and log in, 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.
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 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. (Here are my three best tricks to raise your score 40 points ASAP.)
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.
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
- Payments
- 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 a credit card statement balance and a 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 the statement balance will start to accrue daily interest after your payment due date.
What happens if you pay your credit card 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 the 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.
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.)
Decrease spending
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.
Related Reading:
- How I Overcame a Shopping Addiction + 6 Tricks I Used to Decrease Spending
- How to Stop Spending Money: 61 Things to Do Instead
- The 6 Easiest Things to Cut When Paying Off Debt
- 10 more cheap things to do (that aren't shopping)
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.
Related tips:
- 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.
Related Reading:
- Want to Save More? Here is your guide to aggressive savings
- How to create a budget in 6 easy steps so you never feel poor again
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.
Related Reading:
- How to use a debt tracker to accelerate debt payoff (+ a free template!)
- Having trouble getting out of debt? Here are 10 money fixes
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.
Related Reading:
- What is a debt consolidation loan? How can I use it to get ahead financially?
- What is a balance transfer offer and how can it help me get out of debt?
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.
How does a credit card balance transfer work?
A balance transfer works by transferring credit card debt to a new card, preferably one with a lower interest rate and better terms.
It doesn’t reduce your debt, it just gives you more time to pay off debt and save on interest rates. Your old card would be paid off and you would owe payments to the new card. Usually, there is a promotional period where the interest rate would be 0%.
But there are certain items to be mindful of when evaluating balance transfer offers:
- Balance Transfer Fees – Most balance transfer fees range between 2% to 5% of the total amount of your transfer between cards.
- Interest Rates – Balance transfer interest rates and purchase interest rates will be different.
- Promotional Rates – Look for cards with a promotional 0% balance transfer interest rate. This gives you a limited-time to pay off an interest-free balance.
- Promotional Periods – Understand the promotional periods on balance transfers. Most cards will offer zero transfer fees and 0% interest rates only for a limited time. For example, if you don’t pay off the transferred amount within 12 months, the normal balance transfer APR will apply. Sometimes those APRs can be upwards of 25% retroactive.
- Promotional Rewards – Are there any balance transfer rewards? Some cards offer rewards when you transfer a balance and pay off the balance during the promotional period. These are worth looking into.
What does it mean to transfer a balance?
Transferring a balance means transferring a portion or all of an existing debt from one credit card to another. This does not reduce the original amount you owe, it just transfers the debtor to whom you owe it to.
People transfer balances all the time to lower credit card or loan interest rates and fees, increase credit card rewards, or consolidate debt.
Do credit card balance transfers affect your credit score?
Yes, balance transfers will affect your credit score. And, often you must have good credit in order to qualify for them. (690+).
The perks that make balance transfers worth it (zero interest and fees, long promotional periods, rewards, etc.) are reserved for those with high credit scores.
Here are the factors of obtaining a balance transfer offer that will affect your score:
- Hard inquiry – You’re applying for a new card. It may not affect your score overall but will impact it if you already have multiple inquiries already
- New account & Credit Utilization/Ratio – It will lower the average age of open accounts and may affect overall score negatively but paying down card balances will affect your score positively. Having a larger credit amount with lower utilization rate will benefit your credit score in the long run.
- Just make sure you don’t close the credit cards you just transferred your balance from because this will change your credit limits and utilization ratios.
Should I pay off credit card balances with the highest amount or highest interest rates first?
Which one you decide to pay down/off first is a matter of personal preference.
Where balance transfer offers make a difference is when you’re able to save on interest rates through transferring your balance onto a card that offers a 0% interest for a limited amount of time. Thus, giving you time to pay off that balance.
The amount of time it takes whether you pay down the balance versus interest first does not make a ton of difference. If you want to save on paying interest then you would pay off the higher interest rate cards first.
Is it a good idea to do a balance transfer?
These things can make a balance transfer a smart step in paying off debt and it can be worth it if you can find a good card:
- Verify that your credit score is good enough to qualify for 0% balance transfer and a no-fee card.
- Make sure the credit limit on the new card is high enough to take on the balance of the old card.
- Look for a balance transfer card that offers no fees first.
- Verify that the promotional payoff period is long enough for you to be able to pay off your balance in full before any interest rates apply (or else doing a balance transfer isn’t worth it).
- Make sure the card you are transferring to has a 0% interest rate for the promotional period you’ll be paying off your debt. There are too many choices out there to settle for one that isn’t 0%.
You want to make a smart decision and be able to pay off all your credit card debt so use the above criteria when looking for a balance transfer card.
Other Options for Eliminating Credit Card Balances
Consolidation/Refinance Loan
A refinance loan works for those with over $5,000 in debt.
You apply for a loan (at a lower interest rate than offered on a credit card.) You apply, get approved, you get the funds and you pay off your credit cards with this money. Then, each month you pay the loan provider.
A debt consolidation loan (typically) a lower monthly payment at a much lower interest rate. This means you'll save money on interest, and have more money in your budget for additional payments. This means if you have debt, these can be a really strategic tool for you to use to get out of it faster.
When evaluating debt options, it only makes sense if you run the numbers. Here is my favorite interest rate calculator so you can see the difference consolidation can make.
The Final TL:DR
- Balance transfers can make sense if you want to consolidate high-interest debt to a 0% interest rate for a set period of time.
- You'll save money because you'll be paying 0% interest on balances instead of 17-24% on credit cards.
- Balance transfer offers are typically reserved for those with good to excellent credit, but it's still worth investigating.
- If a balance transfer offer isn't available to you, consider a personal loan to consolidate debt.
Related Reading:
- Side hustle ideas to make your next $100, $1000, or $5000 dollars
- 17 money making apps for your side hustle arsenal
