If you already have a credit card or just thinking of getting one, you have probably heard and seen the term credit card balance used a lot but what exactly is the credit card balance and what does it include?
A credit card balance is the total amount of money owed on a credit card by the borrower to the credit card company. The credit card balance is made up of transactions, fees and interest and can be reduced by making payments.
The guide below explains exactly what the different components of the balance are, what the difference between an account balance, statement balance and available balance is and exactly how the balance changes.
What is the credit card balance made up of?
The credit card balance is the grand total of everything that you owe to the credit card company.
This means that it includes the following components:
|Credit card balance component||Explanation|
|Credit card transaction spend||Made up of purchases, cash withdrawals, balance transfers and money transfers|
|Spend and account fees||Fees incurred when making transactions or using the account - e.g. balance transfer fees, money transfer fees and annual account fees|
|Interest charges||Interest incurred on the revolving parts of different transaction balances|
|Penalty fees||Fees incurred for breaking Terms and Conditions by the customer - e.g. late payment fees and over limit fees|
There are a lot of different types of fees and interest charges on a credit card - check our credit card fees and charges guide for the full rundown.
What is the difference between the statement balance and the account balance?
People often talk about the "credit card balance" but don't necessarily understand what the difference is between the statement balance and the account balance.
The credit card statement balance is the total amount you owed on your credit card at the moment the credit card statement was generated.
This is the balance that gets printed on your statement and should you wish to repay your balance in full, this is the amount you have to pay by the next payment due date.
The account balance is the running total of the amount owed that is constantly updated as and when different kinds of transactions, fees, interest or payments are added to the account.
Theoretically your statement balance will equal the account balance at the exact moment the statement is generated although some calculations can run on data that is a day or two out of date so even then the two might not match.
What is available balance on a credit card?
The available balance is the amount of money you are able to borrow on your credit card at that particular moment.
It is the difference between your credit limit, your account balance and (depending your credit card company) any pending transactions.
If you're planning to spend on your card make sure you check if pending transactions have been taken into account when calculating your available balance. All you have to do is a simple calculation:
Subtract your credit card balance (the current one, not the statement one) from the credit limit.
If you have any pending transactions on your account (most credit card providers now show this in the "Pending" section of your Transactions account area), subtract this as well from the answer to the above.
The number you have is the current available balance on your credit card.
Why your available balance does not tally up with the account balance
Pending transactions really should be taken into account when showing you your available balance, but all too often credit card companies either don't show you the pending transactions or forget to take them into account.
If you made a large purchase in the last day or so and your card provider doesn't take pending transactions into account when calculating your available balance then it will be showing you a higher available balance than you actually have.
Here's a quick explanation of what pending transactions are - I'll need to write a separate article to go into all the detail.
When you pay for something with your credit card, your credit card company does something called an authorisation. They reply to the request for a payment saying they authorise this transaction.
The actual payment for the transaction is then captured and then typically settled overnight if the next day is a business day as part of a complex payment process between financial companies.
Only when the transaction is settled, will it appear on your account properly and be included in your account balance.
So when you see a transaction showing up as pending, it means your credit card company has authorised it, but it has not yet been settled.
What is the difference between revolving balance and transactional balance on a credit card
Just when you thought you know all there is to know about a credit card balance, here's an important thing to know - not all balances are created equal.
The two types of balances on a credit card are revolving and transactional. To make matters more complicated, some transaction types (purchases and balance transfers) can have both revolving and transactional parts of the balance depending on your spend and payment history while cash and money transfers are always revolving.
I know - we're getting a little technical here, but it's a very important distinction. Here's a simple way of differentiating between the two.
A transactional balance is one where the balance from the previous statement has been repaid in full. That means that this month's statement will not charge interest on the balance... except trailing interest which does get charged if you did not repay in full the month before but did last month. This one is pretty complicated and I'll have to write a long article for anybody who cares enough about it on another day!
A revolving balance is balance that incurs interest charges. In most cases this is because you did not repay the balance in full the previous month.
Cash and Money Transfer transactions usually charge daily levels of interest that apply from the day you made the transaction so whether or not you repay the balance in full and are a transactor on your other balances, the cash parts of your balance will always incur interest charges.
How does the credit card balance change?
The credit card balance changes every time a transaction is posted to your account. Note that a transaction posting to the account is not the same as you making a transaction - this will typically happen overnight a day or two after you've actually made the transaction.
There are 4 typical types of transaction that affect the balance in slightly different ways.
- You make a purchase or a different type of transaction using your credit card - it will post to the account and increase your balance in 1 or 2 business days depending on what day and time you made the transaction.
- Your transaction has incurred a fee - e.g. you withdrew cash from an ATM or spent money abroad. Most credit card companies will post this fee to your account at the same time the actual transaction goes through, but some companies will post it right away instead.
- Standard statement charges - things like interest or any applicable monthly fees get posted to your account on the statement date. These don't take any time to process and are added to your balance as soon as they are calculated.
- Payments - depending on the payment method you use, these will reduce your balance either immediately (if you make a faster payment and your card company has good tech) or in a few days time if you pay on the credit card website or using a giro slip.
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