If you’re one of millions of Americans that don’t pay off their credit card balance in full every month, you’re not the only one. A 2016 Gallup poll found that 48% of Americans carry credit card debt month-to-month. While a credit card balance may seem straightforward, when you understand exactly what it is and how it’s calculated, it can help you make better financial choices when it comes to spending, budgeting and paying down your credit card balance responsibly.
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- 0.1 Credit Card Balance: a Definition
- 0.2 How is a Credit Card Balance Calculated?
- 0.3 Statement Balance and Minimum Payment
- 1 What does it mean to get a credit balance on a credit card?
- 2 How Credit Card Balance Transfers Work
- 3 What Do Outstanding Credit Card Balances Mean?
- 4 What Does it Mean to Revolve a Card Balance?
Credit Card Balance: a Definition
Your credit card balance is the amount of money you owe to your credit card company on your account. It could be a positive number if you owe money, a negative number if you’ve paid more than you owe or zero if you’ve paid off the balance in full.
How is a Credit Card Balance Calculated?
Your credit card balance is calculated using your recent purchases, unpaid balances, interest charges and any fees incurred during the billing cycle. You can find out your most current balance by logging into your credit issuer’s portal or calling customer service — and some offer mobile apps where you can check and pay off your balance.
Statement Balance and Minimum Payment
Your credit card balance today may not be the same as your statement balance, which is what is shown on each statement.
When your billing cycle closes and you receive your statement, it will show you two things: your statement balance (it may also be written as “new balance”) and the minimum payment due. If you pay the statement balance in full by the payment due date each month, otherwise known as the grace period — the period of time after receiving the statement — you won’t be charged interest on purchases. On the other hand, if you pay the minimum payment due, the remaining amount of the balance could be subject to interest charges. Be sure to check your cardmember agreement for details. It is best to pay off your credit card balance in full each month to avoid accruing interest charges.
You may have credits applied to your balance in a few instances: when you make payments to your credit card, when you receive credit card rewards (or you credit yourself with rewards you’ve earned), or when you return items you purchased with your credit card.
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Take this calculation as an example: If you had a balance of $100, meaning you owe $100 to your credit issuer, and then you receive a $500 credit from returning an item, for example, you would have a positive balance of $400. This is known as a credit balance. Basically, it’s a surplus of funds on your account. Alternatively, you could call the credit card company and ask them to send you the surplus of money via check.
Overall, keeping a close eye on your credit card balances will help you keep track of your spending and spot any potential errors. Doing so regularly also can alert you to possible fraudulent activity on your credit card account.
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What does it mean to get a credit balance on a credit card?
This typically means the balance has been over paid at some point. Due to the excess payment, a credit now exists in the card holder's favor. Typically this will be deducted from the next payment cycle prior to billing the customer.
How do you inquire about your credit card balance?
What are some ways to pay off a credit card?
When a credit balance exists in a customer's account, one of several things may occur. The institution may roll the existing balance forward to cover or reduce future bills. A customer can also request the institution provide them with the credited funds in the form of a check. In order to determine what a particular credit card institution will do with the credit balance, customers may call the customer service phone representatives for specific details.
The policy should also be described in the credit card company's service contract, which customers agree to when they first sign up with the company. If a credit balance refund is requested, it typically takes up to ten business days to receive the requested check.
A customer can build a credit balance on a variety of different accounts, including utility bills, credit cards, phone bills, hospital bills and even store purchases, if the customer later chooses to return a purchased product to the store.
How Credit Card Balance Transfers Work
What does a balance transfer on a credit card mean? Simply, it means moving the outstanding debt from one piece of plastic to another card, usually a new one. Credit card balance transfers are typically used by consumers who want to move the amount they owe to a credit card with a lower interest rate, fewer penalties or benefits, such as rewards points or travel miles.
Many credit card companies offer free balance transfers in order to entice people to choose their products over a competitor's. As an additional sweetener, they often offer a promotional or introductory period of anywhere from six to 21 months (federal law requires at least six), in which no interest is charged on the transferred sum. With proper diligence, savvy consumers can take advantage of these incentives and avoid high interest rates while paying down debt. But they need to study offers carefully, as many credit transfers involve unexpected charges and other conditions that impact those great-sounding terms.
How to Do a Credit Card Balance Transfer
If you've been approved a new credit card with a 0% interest balance transfer offer (and make sure that anyone who is approved for the card will get the 0% rate, or if it depends on a credit inquiry) here are the steps you’ll want to take before you actually make the move, and the steps for completing the transfer.
1. See where you stand and choose balances to transfer.
List all of your credit cards, their balances and their interest rates. Choose one or more cards with high rates whose balances you’d like to transfer to save money on interest. The balance doesn’t have to be in your name to qualify for a transfer, so if your new spouse has a high-interest credit card balance and you have excellent credit, you might use a 0% offer to help pay off his or her old balance and start over together debt-free.
2. Calculate your balance transfer fee.
Note the balance transfer fee if there is one, and calculate how much you’ll pay on the amount you want to transfer. The fee is typically 3% to 5%, meaning you’ll pay $30 to $50 or every $1,000 you transfer. Even with the new, lower interest rate, will you still come out ahead after the balance transfer fee? Use an online balance transfer calculator to do the math.
Also note if there's an amount cap on the fee. If so, that can really make transferring larger balances worthwhile. Say, for example, there's a balance transfer fee of 3%, up to a maximum of $75. You transfer a balance of $5,000 – but because of the cap, you don't pay $150 (3% of $5,000) but $75: an effective interest rate of only 1.5%.
After the transfer, you can’t just forget about the balance and let it sit there for a year. You still have to make the minimum monthly payment on the card before the due date to keep that 0% rate. If you miss one, the balance may immediately start incurring interest. Pay attention to the interest rate you’ll pay: Will it be a default rate that’s higher than what you’re paying now? Similarly, if you default under any of the cardholder agreements, such as making payments late, going over your limit, or bouncing a check, the interest rate can jump to a penalty rate which could be as high as 30%.
4. Know when the promotion ends and what happens when it does.
The 0% rate is usually valid for 12 or 18 months. If you’re planning to pay off a transferred balance during an introductory period, calculate whether you’re likely to be able to pay it in full during that time. If not, what interest rate will you pay when the introductory period ends, and will you still come out ahead? Don’t expect a reminder from the credit card company that your promotional rate is ending, by the way: It's hoping that you'll miss the deadline and have to start paying interest on your balance.
5. Check the time limit for completing the transfer.
If you’re getting a new credit card account, the terms will require you to complete the balance transfer within a certain number of days (usually one to two months) to receive any promotional rate. Read the fine print carefully to see how big that window of time is. Complete the transfer the day after that window closes and you’ll pay the regular interest rates.
6. Make sure you meet the basic requirements for the balance transfer.
Generally, you cannot do a credit card balance transfer if your new account is with the same company as the card whose balance you want to pay off – for example, you cannot transfer a balance from one Citibank credit card to another. Also, if you have a past-due payment with the creditor to which you want to transfer the balance, or if you have filed for bankruptcy, your transfer request may be declined.
7. Decide how much to transfer.
Check the credit limit on your new card: You can’t request a balance transfer for more than your available credit line, and balance transfer fees count toward that limit. For example, if you have $10,000 in available credit, you won’t be able to transfer a $10,000 balance with a 3% balance transfer fee; you’d need to have $10,300 in available credit to complete the transaction. The most you’ll be able to transfer is around $9,700.
8. Decide where you want the balance transfer funds to go.
Do you want them to go directly to another creditor to pay off your balance? Do you want the funds deposited to your bank account so you can pay off other debts? In the latter case, make sure the credit card explicitly states that having funds deposited to your bank account will not be considered a cash advance. If you accidentally take out a cash advance, you’ll pay interest on the transaction immediately, and usually at a high rate.
9. Request the balance transfer with your new creditor by following its specific instructions.
Although it's called a balance transfer, what's actually happening is you are using one credit card to pay off another one. The mechanics look something like this:
Balance transfer checks: The new card issuer (or issuer of the card you're transferring the balance to) gives you checks. Simply make the check out to the card company you want to pay. Some credit card companies will even let you make the check out to yourself, but again, make sure this won’t be considered a cash advance.
Online or phone transfers: Have the name, payment address and account number for the balance you’re paying off, with the amount you want to transfer.
For direct deposit: Have the bank account and routing number of the account into which you want to deposit the balance transfer funds.
10. Watch your old and new accounts.
You might inquire, if it's not stated anywhere, about the transfer timeframe. In any event, allow at least two to three days – and up to 10 days – for your new creditor to pay off your old creditor. Eyeball each old account whose balance you’re paying off to see when the balance transfer clears. In the meantime, don’t miss any payment deadlines on those accounts so you don’t incur any late fees. Keep an eye, too, on your new account to see when the balance has transferred over, especially if you want to use the card to make purchases.
No doubt about it, a transfer can save you money. Say you have a $5,000 balance on a credit card with a 20% APR. Carrying that balance is costing you $1,000 a year at this rate. Then, you get a balance transfer offer on a new credit card, with terms of 0% interest for 12 months. You can move your $5,000 balance to the new card and you’ll have a whole year to pay it off with no interest. You just have to pay a 3% fee to transfer the balance, which amounts to $150. Even after the fee, you’ll come out way ahead by not paying interest for a year, as long as you put about $415 per month toward your $5,000 balance so that it’s paid in full by the end of the promotional period.
What about transferring a balance if there's no 0% interest rate offer – is it worth the time and hassle? It can be, but do the math first. Say you have a $3,000 balance with a 30% interest rate. At 30% APR, you’re currently paying $900 a year in interest. You see a card with a 27% APR, and a 3% transfer fee. Transferring your balance means you’d be paying $810 in interest a year; add on the $90 balance transfer fee, and it's up to – guess what – $900 a year. You’d about break even after a year. In this example, to come out ahead, you’d need to look for a deal where the APR is less than 27%. A better plan might be to ask your card issuer for an interest-rate reduction to 27%, so you don't incur a fee.
While these credit card balance transfer offers look great on the surface, people who take advantage of them might find themselves on the hook for unexpected interest charges. The problem is that transferring a balance means carrying a monthly balance, and carrying a monthly balance – even one with a 0% interest rate – can mean losing the credit card’s grace period and paying surprise interest charges on new purchases.
The grace period is the time between when your credit card billing cycle ends and when your credit card bill is due, during which you don’t have to pay interest on your purchases. By law, it must be at least 21 days. You only get the grace period if you aren’t carrying a balance on your credit card. What many consumers don’t realize is that carrying a balance from doing a promotional balance transfer affects the grace period.
With no grace period, if you make any purchases on your new credit card after completing your balance transfer, you'll rack up interest charges on those purchases from the moment you make them. When that happens, some of the money you’re saving by having a 0% interest rate on the balance transfer will go right back out of your pocket.
Let's say you need to fork over $150 for toilet paper, paper towels and other household essentials during a routine shopping trip and you charge it to your new card, the same card to which you’ve transferred the balance.
You assume that, if you pay the full $150 when your bill comes due in three weeks, you won't owe any interest on the purchase – after all, you just made it. But when your credit card statement arrives, you find you’ve been charged 15% APR – your new card’s interest rate on purchases – on your $150 purchase. It’s a small amount, but there’s the principle of the thing: If you’re going to pay interest or fees to a credit card company, you want to do it knowingly, not because the company caught you off guard.
It gets worse. In your mind, the amount you owe for the balance transfer and the amount you owe for purchases are separate. Just send in your payment for $150 plus the $1.25 or so in interest, and you’ve got your grace period back and everything is fine, you think. But if your credit card company applies payments to the lowest-interest balances first, your $151.25 will go toward your balance transfer amount, and your $150 purchase will keep sitting there accruing interest at 15% until you pay off your entire balance transfer, your purchase and all the interest you’ve accrued. Plus, any more new charges will start incurring interest from the day you make them.
The only way to get the grace period back on your card and stop paying interest is to pay off the entire balance transfer, as well as all your new purchases. And if you had enough cash saved up to do that, you probably wouldn’t have done the balance transfer in the first place.
Balance Transfers to Existing Cards
You don't have to open a new account to do a credit card balance transfer; you can do it with an existing card, especially if the issuer is running a special promotion. Transferring a balance over to a lower interest rate card is often a good idea; even if your balance isn't paid off before the promotional rate expires on the balance transfer, the remainder will be paid off at a lower interest rate.
However, it can be tricky if you already have a balance on the card to which you are transferring more debt. Suppose that you owe $2,000 on your credit card with a 15% annual percentage rate (APR) before you transfer a balance of $1,000 from your second card. The balance transfer rate you are offered is 0% for six months. You pay off $1,000 in six months, but because the 0% portion of your credit card debt is paid first, you will be charged at the 15% APR rate for six months for the $2,000 that was untouched by payments. Meanwhile, the card you transferred $1,000 from has a rate of 12% APR, representing a loss of 3% for you. You could cost yourself money in interest paid and transfer charges by using a balance transfer offer in these circumstances.
You also need to consider what adding a big sum to a card will do to your credit utilization ratio – that is, the percentage of a consumer’s available credit that he or she has used – which is a key component of your credit score. Say you have a card with a $10,000 limit with a $1,250 balance. You are using 12.5% of your credit limit. Then you transfer $5,000, creating a total balance of $6,250. You are now using 62.5% of your credit limit. This 50% increase in your balance on one card could hurt your credit score, and ultimately cause the interest rate to rise on this and other cards.
Balance Transfer Vs. Personal Loan
Some financial advisors feel credit card balance transfers only make sense if you can pay off all or most of the debt during the promotional rate period. After the promotional period ends, you are likely to face another high interest rate on your balance, in which case a personal loan – whose rates tend to be lower, and/or fixed – is probably the cheaper option.
However, if the personal loan has to be secured, you may not be comfortable pledging assets as collateral. Credit card debt is unsecured, and if you default on it, it's unlikely that the card issuer will sue you and come after your assets. That changes when you open a secured personal loan; the company can take the asset to recoup its loan if you can't make the payments.
If you’d like to do more research, there are several credit card comparison websites that can help you find the best balance transfer credit card for your situation:
The chart below outlines top balance transfer promotions offered by card companies, based on the length of the 0% APR offer period and the sizes of the transfer fee and post-promotion transfer APR.
[Note: This is an interactive chart, so you can click on an individual card to get more details. Or, click on "View Full Comparison" to get even more information about how the cards compare.]
When consulting any credit card comparison website, be aware that these sites typically get referral fees from the credit card companies when a customer applies for a card through the website’s affiliate link and is approved. Take any rankings with a grain of salt, too. Also, some credit card companies have influenced the information that websites post about their cards in a way that means you might not be getting an accurate picture of a card’s costs. Be sure to read the fine print at the creditor’s website before you apply for any card.
Transferring a credit card balance should be a tool to help you get out of debt faster and spend less money on interest, without incurring charges or hurting your credit report. If you understand the fine print outlining the terms (sometimes these statements aren’t even in the credit card offer itself, but elsewhere on the credit card issuer’s website, such as in a help, FAQ or customer service area), do the math before applying to make sure you’ll come out ahead, and create a repayment plan you can stick with, grabbing a 0% interest offer on a new card could be a shrewd move. However, you might consider treating that transfer as a loan: Don't use the card for any purchases until you've completely paid off the balance transfer. If you want to be able to spend with it, then try to find a credit card that offers a 0% introductory APR for the same number of months on both balance transfers and new purchases.
What Do Outstanding Credit Card Balances Mean?
When you look at a monthly credit card statement, you see an amount labeled "account balance" or "new balance." This is the outstanding balance. As of early 2018, the average outstanding credit card balance for Americans was $6,375. Carrying a big credit card balance will cost you a pretty penny in interest — and it won't help your credit rating, either.
An outstanding balance on a credit card account is simply the total amount you owe at a given time. For example, the outstanding balance on your monthly bill is the total debt as of the statement date. Outstanding balance is computed starting with the old balance from the previous month. The card issuer credits payments and adds new purchases, fees and interest to calculate the current outstanding balance. The typical statement often includes your previous balance, most recent payment and purchases, any interest applied and your current outstanding balance.
Carrying a large outstanding balance on credit cards comes with a hefty price tag in interest charges. Suppose you run a monthly balance of $7,000, or a bit more than the national average. If you're paying 15 percent interest, that comes to $87.50 per month or $1,050 per year. Paying down credit cards and then paying the outstanding balance each month will eliminate most of this interest expense. In fact, some credit cards feature a grace period. If you pay off the outstanding balance within the grace period every month, you won't pay any interest at all.
Compounding means that interest is calculated and added to the outstanding balance periodically. From that point on, the added interest earns still more interest. Credit card issuers usually compound interest daily. This means your outstanding balance grows every day and so does the amount of interest you pay. If the stated interest rate is 15 percent, compounding raises the annual percentage rate to 16.4 percent. Thus, compound interest makes carrying an outstanding balance more expensive.
Outstanding Balances and Credit Scores
Even if you pay your credit card bill on time every month, a large outstanding balance can damage your credit score. This is because of something called the credit utilization rate. Credit reporting agencies calculate the utilization rate by dividing your credit limit into the outstanding balance. Suppose your credit limit is $7,500 and the outstanding balance equals $6,000. This works out to a credit utilization rate of 80 percent. According to Experian, a high credit utilization rate indicates increased risk for lenders if they loan you money and therefore lowers your credit score. Experian suggests keeping the outstanding balance under 30 percent of your credit limit. To save more, pay off the outstanding balance every month.
The term "outstanding balance due" is closely related to the concept of outstanding balance. Both terms refer to the total amount owed, but in different contexts. Normally, the only amount due each month on a credit card is the minimum payment. The rest of your outstanding balance is not due for payment. Outstanding balance due means the entire amount owed is due. Typically, you see this term used when an account is closed due to non-payment.
What Does it Mean to Revolve a Card Balance?
In order to understand the definition of revolving a card balance you first need to understand what a revolving credit account means: how the interest-free grace period works and payment term interact.
There are different types of loans. Installment loans have fixed payment amounts while revolving lines of credit allow the borrower to determine the repayment rate. This flexibility has pros and cons. Proceed with caution! The consequences of revolving your balance may mean:
Revolving your balance – the definition
First, let’s understand what it means to revolve a credit card balance. Most credit cards (not charge cards) provide you the option to purchase something today and pay it off later. Each month you will receive a bill showing the amount owed (the balance), along with a minimum payment amount, and the date the payment is due. You have an opportunity to utilize the card’s grace period, which is the key definition of the real meaning of revolving your balance.
Do you qualify for debt relief? If you are revolving more than $10,000 in credit card debt a settlement program could help you straighten out your finances. Interest charges add up very quickly.
Grace Periods and Transacting a Balance
Your purchases often have an interest free grace period: the time between when you make the purchase and the end of the billing cycle, plus the amount of time the bank allows for you to make a payment. The grace period can work like an interest-free loan from the card company. The interest-free loan period can last as long as forty-five days for purchases made at the beginning of the billing cycle.
If you pay the full amount of shown on credit card statement before the due date, your behavior will be considered transacting – someone generating only interchange fees from merchants. Each time you use your card to make a purchase, that merchant pays a transaction fee which is shared by the card association, the company processing the transaction, and the bank making the loan.
Transacting card-holders make incur no interest charges, and take full advantage of the interest-free grace period built into most revolving cards.
Grace Periods and Revolving a Balance
Revolving your card balance means that you lose your interest-free grace period privileges. There are two ways you can begin to revolve a card balance:
- You make an on-time payment for something less than the full balance owed
- You are late with one or more payments
The Consequences of Revolving a Balance
There are three primary consequences of revolving a credit card balance, and neither does you any good. You are much better off paying the balance in full every month if you can. If you cannot you will incur interest charges, impact on your risk scores and offers for more credit and/or transfer your balance to another card.
Debt consolidation programs help people who revolve credit card balances habitually. It is better to arrest the problem before you hurt your credit score and fall too far into arrears.
You may suppress your credit risk score
The banks do not report whether you are paying interest by revolving your card. This information is jealously guarded by the card issuers. People who revolve balances are their best customers! Banks don’t want other lenders targeting their best customers with pre-approved credit card offers.
But your overall balances may grow while you are revolving, and higher balances and utilization will suppress your score.
The amount that remains unpaid begins compounding interest – often at very high rates. You also begin incurring interest on purchases made during the next billing cycle. The magic interest-free grace period goes away. Interest charges can pile up quickly, especially when making only the minimum payment required by the card issuer.
Interest charges pile up so quickly. This gets so many unwary borrowers into trouble that laws were passed recently requiring card companies to publish the amount of time needed to repay the balance when making only the interest payment. The timeframes can be staggering.
When you revolve your balance the interest charges make you attractive to other card companies. They may see you carrying balances on multiple cards, and surmise that you are incurring interest charges. If you maintain a high enough credit score while revolving a balance (not always easy to do), expect to receive new offers or credit and/or zero interest balance transfer offers.
Taking on new or increased credit is not always a wise choice when you are already revolving a card – spending more than you are bringing in. What other consequences might there be for revolving a balance?