Credit Demystified – Chapter 2, Section 2: Account, Current, Carried, and Statement Balances

One of the more confusing things about managing and understanding credit cards are the different “balances” people talk about in reference to credit card accounts. Knowledge is power and it’s in your best interest to understand the different types of balances and their respective impacts on your cash flow and your credit score.

Let’s break it down.

Balances

Account Balance (also referred to as your Current Balance) is the total amount you owe The Banker. Right now. To date†. It’s the sum total of everything you’ve charged to your credit card less the total amount you’ve paid to The Banker plus interest (if applicable) and fees (if applicable).

Visualized as a formula, it looks like this:

Current balance = Total Charges - Total Payments + fees + interest

In the context of a loan, your account balance is the unpaid principal.

Statement Balance – is the amount The Banker says is due by your next due date. It’s the amount your credit card company is billing you and expects you to pay. If you think back to the timing info we just covered, your statement balance is the total amount you charged during your most recent billing cycle (plus any carried balance due from previous billing cycles) plus fees and/or interest, if applicable.

Visualized as a formula:

Statement Balance = Most recently closed billing cycle amount
 + Unpaid previous balance + fees + interest

In the context of a loan, your statement balance is the payment due this month.

Not to draw too fine a point but:

Account (Current) Balance = what you owe
Statement Balance = what’s due

The reason I draw so much attention to this distinction is that with the advent of online banking and the obsolescence of printed monthly statements, the importance between these two balances has been lost. Is it okay to pay your account balance during the grace period? Of course! But it’s absolutely unnecessary. And there are no real, monetary advantages to doing so. Paying your account balance instead of your statement balance simply means that you’re paying The Banker money you owe before you owe it.

[Every rule has an exception or two. There are times when paying your account balance too early will actively impede the process of building a credit history. And other times when paying early or more than what is due can help reduce your credit utilization ratio. I cover both situations, and more, in Section 3.3: Improving Your Credit Score.]

There’s room for confusion here — and it’s not accidental.

It’s not an official “balance” but it’s a number you’ll encounter often: that’s the Minimum Payment Due. Don’t let this number confuse you. It’s not what is due and it’s not what you owe. It’s the minimum you can pay to keep your account in good-standing and avoid late fees and penalties.

The screenshot below illustrates how these numbers are presented on a typical credit card statement. As you can see, it states that my “New Balance” is $470.80 and right next to that it says that the “Minimum Payment Due” is $25.00. So, is the statement balance $470.80 or $25.00?

It’s $470.80.

Carried Balance – is any unpaid amount that is carried over from one billing cycle to another. Any amount.

While paying more than your statement balance is unnecessary and deprives you of the time benefits of the billing cycle and grace period, paying anything less than the statement balance will result in a carried balance.

The simplest example of a carried balance is the example above. If I were to pay only my $25 minimum payment by the December 2 due date, my account would have a $445.80 carried balance.

A carried balance on a credit card is an interest trigger — the two go hand-in-glove. If you have a carried balance, you are incurring interest.

[Understanding this concept will be really important in Section 2.3 – Interest: Paying & Avoiding when we discuss compounding interest.

There are two extra terms to add to your growing vocabulary:

Pending

Pending – is a weird limbo land where credit card charges (and debit card purchases, as well) sometimes hang out for a little while. They are charges The Banker knows about (or, in the case of debit purchases, your bank knows about) but the charge has not yet been completely processed for some reason; the hand-off between The Banker and the merchant is not quite complete.

A few factors that might cause a charge to hang out in pending are:

• You bought something from a small-time, low-volume merchant (the bank might be taking their sweet time validating these charges);
• You bought something late at night or on the weekend or, if you’re like me, late at night on the weekend (in other words, not in normal banking hours);
• Your purchase was at some type of cafe/restaurant/eatery and included a tip. I have no idea why these purchases hang in limbo longer than other charges but they do.

An interesting tidbit you might or might not have noticed: charges that included a tip will show up in your online account showing only the original purchase amount (no tip). It’s only when the charge transitions out of pending into your list of cleared transactions that the tip is added to the transaction total. In other words, if your tab came to $12.50 and you added a $3.00 tip, the charge will show as $12.50 while pending but then will show as $15.50 in your list of cleared transactions.

Paid In Full

PIF (Paid in Full) – is a term found in common use among personal finance and budgeting communities but don’t expect to see it on any of your official credit card statements, etc. It is not a term employed within the banking industry. But as a financial wellness coach, I use and encounter it frequently.

So, what is a PIF credit card?

If you have a credit card on which you pay your statement balance in full each and every month and you’re not paying any interest for charges on that card then it’s a PIF credit card.^‡

Using a visualization similar to the ones I used above, a PIF card would be visualized as such:

Statement Balance + new transactions since last closing date = Current Balance

Or, put another way:

Statement Balance = total charges from most current completed Billing Cycle

If that all sounds and looks like a lot of gibberish, I apologize.

My point here is that with a PIF card your upcoming statement balance is only going to reflect the activity from your previous billing cycle. Each new statement balance contains only one billing cycle’s worth of activity. You’re not dragging any past charges, accrued interest, fees, and partial payments from one billing cycle into the next.

If this still isn’t clear, the screenshot below might help. First, notice that the blue arrow indicates the previous balance. That’s from the statement before this current one. Now note that the green arrow indicates the payment amount is exactly the same as the previous balance. The amount billed was $337.44 and the amount paid was $337.44.

Next, note the two orange arrows indicating the transaction total. That’s the total amount of charges made during this most current (and just recently closed) billing cycle. Note that because last month’s balance was paid in full, the transaction total is the same as the new balance. Also note that there are no fees and no interest charges — because the card has been paid in full. So, as illustrated,

Statement Balance = total charges from most current completed Billing Cycle

And to finish the screenshot demonstration, below is a screenshot (taken on the same day during the same visit as the above screenshot) of my account balance. Note the amount in the blue box below (last posted payment) matches the amount of the blue and green arrows above (previous balance/payment). And note that the orange box below (last statement balance) matches the orange arrows above (transactions/new balance). Now note the dollar amount circled in pink: my Current Balance. The difference between my Current Balance and my last Statement Balance represents the total amount I have charged so far during my current Billing Cycle, or, as visualized above:

Statement Balance + new transactions since last closing date = Current Balance

The math, in case you’re wondering, works out to $599.21 which, happily, is the total of new charges listed in my account after the Billing Cycle closing date: November 5, 2017. As you’ll notice, the first charge on the list below is dated November 10 — five days into the new billing cycle.

Recap

The advent of online, 24/7 banking, and electronic communication has had a profound effect on how consumers interact with their credit card accounts. Constant, up-to-the-minute access to their accounts has blurred lines and made it more important than ever to understand the difference between what’s owed in general and what’s due now. If you want to use your credit cards to your best advantage, reap all the benefits and rewards and avoid the devastating pitfalls, you need to understand which balance to pay and what it means to have a paid in full balance.

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^† This total does not include Pending charges.

^‡ It is possible to maintain paid in full cards (no interest charges) and still be in credit card debt. This is a situation known as “riding a float.”]

next >> Section 2.3: Interest – Paying & Avoiding