Chapter 2: Credit Cards – An Owner’s Manual
Remember our conversation about Debit vs. Credit Cards and how The Banker in your pocket keeps a running tab of your credit card charges? Remember how every 30 days or so The Banker tallies up everything the bank paid for and sends you a bill?
Well, now it’s time to talk in a little more detail about that process. Below are a number of terms you’ll want to understand. Let’s deconstruct each term on its own and then put all of the pieces together to see the complete picture.
The Billing Cycle or Billing Period – refers to the period between when The Banker starts a new sheet for your charges and when that sheet is tallied and a new one is started.
Each credit card account has a Billing Cycle. Each Billing Cycle begins with an Opening Date and ends with a Closing Date. Note: The term Billing Period is interchangeable with Billing Cycle; for the sake of simplicity and consistently I will use Billing Cycle.
Opening Date – is the day each month that your banker starts a new tally sheet for your credit card charges. This day could be any day of the month — it does not necessarily fall on the first day of the month and it will not necessarily fall on the same date each month.
Closing Date – is the last day for charges to be included in your current tally sheet. At the close of business on your Closing Date, the current Billing Cycle is closed out, done and dusted, wrapped up, in the can.
Depending on your credit card company, your opening and closing dates may be on the same date every month or they may vary and appear random. The same goes for the length of your billing cycle — it can vary from month to month or always be a fixed number of days.
As you can see from the screenshots below, in 2017 the June billing cycle for my Citi® card opened on June 24th (Saturday) and closed on July 25th (Tuesday) for a total of 33 days. Then my next billing cycle opened on July 26th (Wednesday) and closed on August 23rd (also a Wednesday) for a billing cycle of only 29 days.
Grace Period – is the time between when when your new statement is issued and when your payment is due.
Federal law states that credit card issuers must allow least 21 days’ grace between issuing statements and requiring payment without fees or penalties. Remember, these rules were all established when snail mail and paper checks were how business was conducted. So, once the statement is issued, you get a minimum of 21 days to receive your bill, send in your payment, and have that payment processed.
While banks can’t give you fewer than 21 days they can — and do — establish longer grace periods. I’ve seen grace periods up to 30 days long. [Don’t be fooled; longer grace periods often work against consumers’ best interests and result in larger profits for banks in the form of additional interest charges.]
Statement Date – is the date The Banker prints up your monthly statement and officially presents you with a bill.
In the land before time, back when “computers” were large groups of women armed with manual typewriters and 10-key calculators, statements were typed, folded, put into envelopes, stamped, and delivered to cardholders via the post office (or, as it has come to be called, “snail mail”). While there are those who still get paper statements delivered in their mailboxes, a lot of us now just get email notifications that a new statement is ready.
But whether you get your statement in the mail or not, the statement date is the date on which your statement is generated. It lists all of the activity — payments, charges, credits, corrections, fees, and interest charges — that occurred during the just-completed billing cycle.
Reporting Date – is the date that your credit card company reports your credit activity to the three credit reporting agencies: Equifax, Experian, and TransUnion. Typically, the Reporting Date is within a few days after the closing date.
The reporting date is important because your credit habits — usage and payments — will have a significant impact on your credit score.
Each credit card company has different policies regarding what they report and when they report it. [We’ll go into specifics of what creditors, including credit card companies, report and what all of that data means in Section 3.2 – Credit History & Reports and Section 3.3 – Improving Your Credit Score.] For now just remember that the Reporting Date is usually very shortly after the closing date.
Due Date – is, rather obviously, the date that your credit card payment is due. If you pay your bill after this date, your payment is officially late.
Late payments are problematic for several reasons so of all the dates we just discussed, your Due Date is the most critically important.
Putting it all together
Now that we’ve identified individual parts, let’s put it all together and look at the bigger picture.
Remember, credit cards are called revolving credit because the amount you owe each month is variable depending on how much you borrowed during the previous billing cycle. For most of us, all of these dates and timing stuff — especially the opening and closing dates of the billing cycle — happen without us ever being aware of it. We charge things on our credit cards, we get our bill, we make our payments, and time marches on.
But understanding the interplay of the five dates that make up the billing cycle and grace period are the key difference between someone who has a credit card and someone who uses credit to their maximum advantage.
If you’ll recall when I discussed the advantages of paying with a credit card, one of the factors I mentioned was having your cash sit in your bank account for an extra 21-60+ days. This is thanks to the time buffer created by the billing cycle and grace period.
Here’s how that works:
If you made a purchase on the first day of a 33-day billing cycle and paid your bill on the last day of a 30-day grace period, you will have taken advantage of a 63-day time buffer between when The Banker paid the merchant for your purchase and when you paid The Banker. If you made a purchase in the evening on the last day of a billing cycle and paid your bill on the last day of a 21-day grace period, the time buffer would have been 21 days.
And this is a continually repeating cycle. If your billing cycle started early in the month, purchases made in January wouldn’t be billed until early February and your payment wouldn’t be due until nearly the end of February or even early March!
As long as you pay your statement balance in full every month on or before the due date, the time buffer provided by the billing cycle and grace period works to your advantage. Not only is there no cost to using The Banker’s money but if you’re using a reward credit card, you could be earning cash rewards or points that can be redeemed for purchases in lieu of cash. And if you have a high-interest savings account, your money could be earning interest during the time buffer.
But, this same buffer of time has the potential to be a huge trap as soon as you don’t or can’t pay your statement balance in full. We’ll cover that in Section 2.3 – Interest – Paying and Avoiding.
Understanding the meaning of the dates we covered here — opening, closing, statement, reporting, and due dates — is important if you’re going to be an informed and responsible credit card user. Knowing what each date signifies and the order in which they fall will allow you to make full use of the benefits and advantages of using credit cards while avoiding the traps and pitfalls that can lead to credit card debt. Having a firm grasp on this information is also critical if you wish to achieve, and then maintain, an excellent credit rating.
next >> Section 2.2: Balances