Swiping a credit card for your everyday purchases is quite convenient and hassle-free. But when you buy something on credit, you should always remember that the money that you are using to buy all such things is not your own and you have to pay the amount back to the respective credit card company. It is just like taking a short-term loan and paying back that loan with interest if paid beyond the given time limit. A statement is issued to you every month highlighting the amount that you owe to the credit card companies. But if you have a deep look into the statement, you will notice that there are 2 balances related to a credit card – one is the Credit Card Statement Balance, and the other is the Current Balance.
These 2 balances are prominently visible in relation to a credit card and are quite different from each other. It can be a bit confusing for you to understand if you are a new credit card user or even if you have spent a little time using credit cards. An individual generally gets stuck between what amount to pay out of the 2 to avoid any financing charges. Before going any further, let us first discuss that what is the difference between these two balances that are associated with a credit card.
Credit Card Statement Balance
Credit cards generally have Billing cycles that generally range between 30-55 days depending on bank to bank. Credit Card Statement Balance is the balance that the credit cardholder owes to the credit card company and needs to pay by the payment due date. This balance is the full amount that includes the balance of the current billing cycle plus the pending amount from the previous cycles as well. For example – the billing cycle of your credit card starts on the first of every month and ends on the 25th of the same month. Now, a credit card bill will be generated that will show the total amount of the purchases that you have made in the billing cycle plus any amount that you owe to the credit card companies with the interest component added to it.
For example, you made purchases worth Rs. 1,000 in the billing cycle and you owe Rs. 500 from the previous billing cycle. So, the statement that will be generated at the end of the billing cycle will show a statement balance of Rs. 1,000 + Rs. 500 (plus interest component on this amount).
The second type of balance that is related to a credit card is the current balance. The current balance is the amount that you owe to the credit card company as of the date when you are checking the credit card information. In this way, all the balances of all the transaction done to date will be included in the credit card’s current balance. For example – the bill of your credit card is generated on the 20th of every month and you are checking your balance on the 25th of the month. Then, in this case, your current balance will be the balance till your billing date plus any transaction that you have done from the 20th till the 25th.
For example – You have received your credit card statement and the amount that has to be paid by the due date is Rs. 1,500. Now you are continuously transacting through your credit card and till the 25th you have made transactions worth Rs. 2,000 using your credit card. Now if you check your balance on the 25th of the month, it will be a sum total of Rs. 1,500 and Rs. 2,000.
In many cases, the statement balance will differ from the current balance. Your current balance could be higher than the statement balance as you might have made transactions after you received your statement balance. This balance can differ on a daily basis depending upon the transactions that you make using your credit card.
How do these balances affect your credit score?
The banks report your credit card balances to the Credit bureaus to determine your credit score. It is generally the statement balance that is sent to these bureaus but in some cases, it may even be the current balance as well. It is important to keep such balances as low as possible because your credit score is determined on the basis of such balances. These balances show how much credit have you utilized. The golden rule is not to use your credit utilization ratio beyond 30%. But if you want that your credit score should be improved, you have to keep it well below 10%. The lower the utilization, the higher the credit score.
Which balance should be paid to avoid interest charges?
Now if you want to avoid any interest penalties being charged to your account, you should pay your statement balance in full. If you have your previous balances in full and you have a grace period with you, you should pay the whole of the statement balance to avoid any interest charges in future cycles. This amount should be paid before the due date of the credit card bill.
Both the balances, namely credit card statement balance and credit card current balance, are quite important terms for credit card users. While one balance lets you know about the total balance that you owe during a billing cycle, the other balance makes you aware of the amount that you have spent using your credit card as on the date on which you are checking the credit card balance. It is not mandatory for these balances to be similar to each other. They can differ from each other based on the transactions made on daily basis. While on the other hand, the statement balance should be paid before the due date ends to refrain from bearing any interest charges that might accrue on the account due to non-payment or late payment. Additionally, we should try to keep the balances as low as possible because our credit score is determined on the basis of these balances only.