Credit cards are an incredibly flexible way to make payments, but understanding how they work will help you make the most of your monthly payments. One of the key terms you’ll come across as your bill arrives is statement balance vs outstanding balance. Here’s what you need to know about the two.
The Difference Between Statement Balance and Outstanding Balance
While “statement balance” and “outstanding balance” sound similar, they can be different amounts you owe on your credit card. Let’s break down the difference and why it matters for your credit card payments.
- Statement balance. This is the total amount you owe for the current billing cycle (the time covered by your latest bill). We’re talking about all your purchases during this cycle plus any fees and interest accrued from your previous statement date. Your statement balance is shown on your credit card statement and that’s the number you want to focus on avoiding. That’s what will keep you interest-free if you pay that balance off in full.
- Outstanding Balance: This is the amount you owe at that moment and includes your statement balance plus any new charges made since your statement date. This amount updates in real time as you pay and make new purchases.
Example
Let's say your credit card statement balance is RM1,000, and after the statement date, you added new purchases totaling RM200. Now your outstanding balance is RM1,200, but your statement balance is still RM1,000. Once you understand how to distinguish between the two, it can help you manage credit card debt and keep the totals from tripping you up later. We’ll discuss how to calculate each and why each is important for your overall finance.
How is Statement Balance Calculated?
Your statement balance is made up of everything you charged in the billing cycle, from last month’s statement date to this month’s statement date. That includes:
- Purchases: Whatever you charged to your card in that billing cycle — groceries, clothing or a hotel stay — whatever it is, it increases your statement balance.
- Interest and Fees: If you have a balance in storage, you’ll accrue interest too, which is added to your statement balance. You’ll also be charged any fees (annual fees, late payment fees, etc.) during the billing cycle.
- Payments: Any payment made within the billing cycle is deducted from that statement balance. Just remember, it is applied to the statement balance, not the remaining balance from last period!
Key Consideration
The statement balance is how much you owe for the statement period and is what you would have to pay if you want to stop accruing interest charges. But that doesn’t account for new charges after the statement date.
How Outstanding Balance Is Determined
The outstanding balance is how much you owe on your credit card overall at any given time, which is made up of:
- Statement Balance: This is the main component of your outstanding balance.
- New Purchases: Any purchases made after your statement date will be added to your outstanding balance. For example, if you buy groceries after your statement date, that amount will show up in your outstanding balance.
- Payments: Payments are subtracted from the outstanding balance immediately they clear. If you make partial payments then the balance amount goes down but not to zero until you’ve paid it off in full.
- Interest charges: Accrued interest from previous periods is added to the outstanding balance, making it greater. This is why you can save on interest by paying off that amount in full!
Why It Matters
Outstanding balance: This is a more dynamic number that can change as new transactions are posted to your account. It’s helpful to keep tabs on because if you're trying to pay off your card quickly, this is the number to focus on.
Why Understanding These Balances is Important
Understanding the difference between your statement balance and outstanding balance can significantly impact your financial planning and debt management.
- Avoiding Interest Charges: When you pay off the statement balance in full, you avoid paying interest, which accrues month by month if you pay only the minimum payment or a part of the outstanding balance.
- Managing Debt Effectively: Knowing the difference helps you prioritize which balance to pay off first, ensuring you're making the most effective use of your payments.
- Keeping tabs on your spending: Your statement balance shows how much of your credit line you’ve tapped into since your previous statement; your outstanding balance shows how much you owe at that moment in time.
How Your Statement Balance Affects Interest and Payments
The statement balance determines how much interest you pay. If you have a balance that “carries over” from month to month, the credit card company will charge you interest on that amount.
- If you pay off the statement balance in full by the due date, you could pay no interest on these purchases.
- If you only pay part of the statement balance, you’re charged interest on that remaining amount as well as new charges that appear in the next statement cycle.
Grace Period
Many credit cards offer a grace period during which you can pay the statement balance in full without accruing interest. This is usually between 21 and 25 days after the statement date, so be sure to make the most of this period and pay off your statement balance in full.
The Risks of Paying Only the Minimum Payment
Paying only the minimum payment on your credit card each month is an option, but it comes with significant drawbacks.
- Growing Debt: Making only the minimum payment? You’re probably just paying the interest on your balance, not chipping away at the principal. Before long, you’ve got an ever-increasing amount you owe.
- Longer Repayment Time: Paying the minimum amount extends the time it takes to pay off your debt. You may end up paying far more in interest than if you paid off the balance sooner.
- Negative Impact on Credit Score: Having a high balance relative to your limit can negatively impact your credit score. By only paying the minimum, you keep your balance high for longer thereby depressing your score due to the adverse effect on your utilization ratio.
On the other hand, paying off the full balance is the fastest way to be free of debt. Plus, you won’t owe any interest.
Payment Strategy: Statement Balance or Outstanding Balance?
Should you pay off your statement balance or your outstanding balance?
When to Pay Only the Statement Balance
If you pay only the statement balance, you can utilize the grace period and steer clear of interest. This approach helps you stay afloat without feeling overwhelmed, but do keep in mind that you’ll need to cover new charges when your next statement arrives.
When to Pay the Entire Outstanding Balance
The ultimate way of taking control of your credit card debt is to pay it off completely. That way nothing is left unpaid, has no interest accruing on it, and you can finally relax.
In some cases, if you're facing high-interest rates or accumulating debt, paying off the outstanding balance may be necessary to prevent your financial situation from getting worse.
Conclusion
Knowing the difference between statement balance and outstanding balance is important so you can make better decisions about how much to pay and when to pay it, so you can stay on top of your credit card debt and avoid extra interest charges.
If you are looking for instant money solutions, Amanahkredit is a fast loan financial company who can lend you money in an instant. If you develop the right payment strategy to your plastic, the better prepared you will be not only to conquer your credit card but to keep it from going into debt and to protect your financial future.
FAQ
Should I pay the statement balance or the outstanding balance?
It’s generally better to pay off the outstanding minimum balance if you can swing it, since that covers everything you owe, including new purchases. If you just pay the statement balance, you’ll avoid interest on that last group of charges, but the new purchases will still build debt on your account — and therefore could accrue interest.
What happens if I only pay the minimum payment?
Paying the minimum payment amounts to only paying interest and fees; your debt is unlikely to pay down. Over time you probably will pay more interest and it will take longer to pay off your balance. Why you need to pay your statement balance to avoid paying interest on previous purchases and late fees.
What happens if I don’t make the minimum payment on my credit card?
If you don’t at least pay the minimum payment, you will get a late fee and the credit card company may notify the credit bureaus, affecting your credit score. Your unpaid balance will also accrue more interest over time.