To decide which balance to pay, consider your financial situation, budget, and overall credit management strategy. If you can, paying the outstanding balance is often the most advantageous option. However, if you need some flexibility in managing your monthly expenses, paying the statement balance can provide some breathing room while still avoiding interest charges on the amount owed.
Questions Answered in this Article
1. What is an outstanding balance on a credit card? The outstanding balance on a credit card is the total amount owed when checking your account. It includes purchases, cash advances, balance transfers, issuer fees, and posted interest.
2. How does the statement balance differ from the outstanding balance? The statement balance reflects the debt accumulated since the previous billing cycle, usually around 30 days, while the outstanding balance represents the total amount owed at a specific moment, including recent transactions.
3. How can I calculate my statement balance? To calculate your statement balance, add up all the purchases, fees, balance transfers, and cash advances made during the billing period, then subtract the payments and statement credits. The resulting amount is your statement balance.
4. Should I pay the outstanding balance on my credit card? Paying the outstanding balance is a wise option if you can afford it. By doing so, you fully settle your credit card bill, avoid interest charges, and reset your credit card balance to zero, which improves your credit utilization ratio.
5. What are the benefits of paying the statement balance? Paying the statement balance triggers a grace period, allowing you to defer payment for new charges until the due date of your next billing cycle. However, it’s essential to be aware of any changes to credit card terms, as some issuers may revoke the grace period or impose interest charges if the statement balance is not paid in full.
Introduction
When it comes to credit cards and loans, understanding the concept of balance is crucial. However, credit cards introduce various types of balances, such as outstanding, current, and negative. This article will delve into the meaning of outstanding balance, its distinction from the statement balance, and why it is essential when managing your credit card payments.
What is an Outstanding Balance?
The outstanding balance on a credit card refers to the total amount you owe at a specific moment when you check your account. This balance encompasses purchases, cash advances, balance transfers, issuer fees, and accumulated interest posted to your account. The outstanding balance is also known as the current balance since it is a dynamic figure that can change daily based on your account activity. For instance, if you log into your credit card app in the morning and find an outstanding balance of $500, but a $50 statement credit is posted midday, the updated due balance you owe becomes $450, regardless of the pending $50 credit.
More: Understanding Balance Transfers: How They Work and Whether They’re Right for You
Differentiating Outstanding Balance from Statement Balance
While the outstanding balance represents the total amount you owe on your credit card, the statement balance reflects only the debt accumulated since the close of your previous billing cycle, which typically spans around 30 days. When you receive your monthly credit card statement, it will indicate both your outstanding (or current) balance and your statement balance. Although these balances can be the same, they may differ if you continue using your card or make additional payments after the statement closing date.
More: Achieving Financial Goals and Paying Down Debt Faster: The Power of Switching to Cash or Debit
Calculating Your Statement Balance
To determine your statement balance, follow these steps:
- Sum up all the purchases, fees, balance transfers, and cash advances made during the billing period, let’s say totaling $3,000.
- Add up all the payments and statement credits made during the same billing period, totaling $1,000.
- Subtract the second amount from the first to obtain the statement balance, which would be $2,000.
If no further transactions are conducted, your statement balance and outstanding balance for that billing cycle will be $2,000. However, if you continue using your card after the closing date, your statement balance remains $2,000, while your outstanding balance includes the additional transactions.
Paying the Outstanding Balance: If you can afford it, paying the outstanding balance is an excellent choice. By submitting a payment equivalent to your current balance, you can fully settle your credit card bill and avoid incurring interest charges. Moreover, paying the outstanding balance ensures that your credit card balance resets to zero, which may not always be true when you pay only the statement balance. Credit bureaus prefer accounts with low utilization ratios, meaning a low percentage of total available credit being utilized at any given time. Financial experts recommend maintaining a utilization ratio below 30%. After paying the outstanding balance, your utilization ratio for that specific credit account will be 0%.
Nonetheless, paying the entire statement balance also offers advantages. Doing so triggers a grace period, allowing you to defer payment for any new charges until the due date of your next billing cycle. However, it’s important to note that some credit card issuers do not provide grace periods, and they might temporarily revoke this perk for cardholders who fail to pay off their balances by the due date.
More: The Pros and Cons of Balance Transfer Offers: How to Save on Interest Charges
Conclusion
Understanding the differences between outstanding and statement balances is crucial for effectively managing credit card payments. While the exceptional balance reflects the total amount owed at a specific moment, the statement balance only encompasses the debt accumulated since the previous billing cycle. Paying the due balance in full is an excellent option if you can afford it, as it allows you to avoid interest charges and reset your credit card balance to zero.
More: Top 5 Ways to Consolidate Credit Card Debt Effectively in 2023
Definition of Terms
- Outstanding balance: The total amount owed on a credit card at a specific moment, including purchases, cash advances, balance transfers, fees, and accrued interest.
- Statement balance: The debt accumulated on a credit card since the previous billing cycle, typically covering around 30 days.
- Current balance: Another term used interchangeably with the outstanding balance, referring to the total amount owed on a credit card at any given time.
- Utilization ratio: The percentage of available credit that is being utilized. It is calculated by dividing the outstanding balance by the total credit limit. Maintaining a low utilization ratio is generally favorable for credit scores.
- Grace period: A period when credit card users can avoid interest charges on new purchases if the statement balance is paid in full by the due date. Not all credit card issuers offer grace periods.
- Billing cycle: The duration between consecutive credit card statements, usually around 30 days, during which purchases and transactions are recorded for billing purposes.
- Balance transfer: Moving an existing debt from one credit card to another, often to take advantage of a lower interest rate or promotional offer.
- Cash advance: A feature allowing credit card users to withdraw cash from their credit line, typically subject to higher interest rates and transaction fees than regular purchases.
- Issuer fees: Charges imposed by the credit card issuer, such as annual or late payment fees, for maintaining the credit card account.
- Credit utilization: The overall amount used for the total credit available, expressed as a percentage. It is an essential factor in credit scoring models and can impact creditworthiness.
- Credit score: A numerical representation of an individual’s creditworthiness, indicating their ability to manage credit responsibly. Lenders often use credit scores to assess the risk of extending credit.
