What is a 'Credit Card Balance'
A credit card balance is the amount of money owed to the credit card company. A new credit card balance may take up to 24 hours to update, once a payment has been processed, depending on the credit card company and method of payment employed. The balance can be positive, negative or zero depending on if money is owed, if a payment greater than the balance was made or the balance was paid in full.
BREAKING DOWN 'Credit Card Balance'
The best approach to manage credit effectively is to maintain a zero credit card balance to avoid the high interest rates associated with a positive balance. If there is a positive balance, paying more than the minimum monthly payment pays it down quicker, resulting in less interest owed to the credit card company.
A credit card balance is the amount of charges owed to a credit card company based on purchases made that have not been paid yet. The balance includes recent purchases, any unpaid balance, interest charges, annual fee and any other fees associated with the credit card such as a late fee or inactivity fee. Every new purchase is added to the balance, and each payment made reduces the balance.
Credit Limit & Score
Paying off the balance saves money on credit card interest, which reduces the money paid to the credit card company and increases monthly cash flow and liquidity. However, carrying a balance month to month lowers a credit score because it increases the credit utilization on the card. An ideal credit utilization is 20% or less. For example, if you have a credit limit of $5,000 and a $4,000 balance on your credit card, your credit utilization is 80%, which is extremely high. This type of behavior shows creditors and lenders that a cardholder is not responsible with credit and is a high risk of defaulting on a future loan or credit card payment.
Maintaining a high credit card balance can lead to disaster. If an unexpected emergency arises, possessing a high balance reduces the flexibility to use a credit card and increases the chance of going further into debt, using risky financial products or paying late fees. Credit utilization is one of the factors used to calculate a credit score. It counts for 30% of a credit score. A low credit utilization proves to creditors and lenders that a cardholder is able to manage credit responsibly.
Using a credit card is essentially using the credit card company’s money to make a purchase. In addition, a cardholder makes a purchase but pays for it with money earned in the future. The key to paying down a credit card balance is to determine the report date; the date an account is reported to the credit reporting agency and pay the bill prior to the report date or statement closing date, which increases a credit score.