What is a credit card balance?

When you charge purchases to your credit card, you will end up with a credit card balance. This balance is the total amount of money you owe to your credit card company.

Balances vary throughout the month. They increase when you make purchases with your credit card, and they decrease when you make credit card payments. Any balance that remains at the end of your billing cycle carries over into the next month, and you will be charged interest on this balance at a set rate. To learn more about credit card balances, including how they can impact your credit score, keep reading.

How credit card balance works

Credit cards are a unique type of payment card that allow you to make purchases without the money immediately coming out of your account. Unlike debit cards, credit cards work like a loan, allowing you to make purchases up to the credit limit without having to pay for these purchases until the end of your billing cycle.

The balance you find on your credit card at any given time is the money you owe your credit card issuer. Factors that can affect your credit card balance include the purchases you make, foreign exchange rates, annual fees, cash advance fees, balance transfers, interest charges, and other fees like late fees or balance transfer fees. Credit card balances typically update every 24 to 72 hours.

You can pay off your balance at the end of your billing cycle or in smaller increments throughout the month. If you only make the minimum payment, the remaining balance will carry over into the next month and you will be charged interest on this balance. This interest charge will be reflected on your next credit card statement. 

Paying off your credit card balance

Paying off your credit card balance – in full and by the end of your billing cycle – couldn’t be more important. The most financially responsible approach to credit card balances is to pay them. When you have a zero balance, you can avoid hefty interest fees.

At the very least, you should be making the minimum payment, but getting into the habit of this can lead to high interest fees and debt. If you are having trouble paying off your credit card each month, contact your credit card issuer immediately. It may be worth switching to a balance transfer credit card with a lower interest rate.  

Credit card balances and credit scores

One of the main reasons to avoid carrying a credit card balance is that it can negatively affect your credit score. Your credit utilization ratio (the total amount of credit in use divided by the total amount of credit available) directly impacts your credit score.

If your credit utilization ratio is consistently above 30% because you are unable to make your payments in full, this signals to creditors that you are irresponsible, thereby lowering your credit score. But if you have a zero balance every month and keep your credit utilization rate below 30%, your credit score will likely increase over time.