Should I pay outstanding balance or statement balance?

Statement Balance vs. Outstanding Balance: Paying Your Credit Card Smartly

Navigating credit card payments can feel like deciphering a secret code. Two key terms often cause confusion: “statement balance” and “outstanding balance.” Understanding the difference between these two can save you significant money in interest charges and contribute to a healthy credit score. So, which one should you pay? The short answer: prioritize your statement balance.

Your statement balance is the total amount due on your credit card at the end of a specific billing cycle. This is the crucial figure that determines whether you’ll accrue interest charges. Paying this amount in full by the due date means you’re effectively utilizing the interest-free grace period offered by most credit cards. Think of it as borrowing money interest-free for a short period, as long as you repay it within the allotted timeframe.

Your outstanding balance, on the other hand, represents the total amount you currently owe on your credit card at any given point in time. This includes any new purchases made after your last statement closing date. While it’s a good idea to keep an eye on your outstanding balance to manage your spending, it’s not the determining factor for interest charges.

Let’s illustrate with an example:

Imagine your statement balance on January 10th was $500, with a due date of February 5th. Between January 10th and February 5th, you make additional purchases totaling $200. Your outstanding balance is now $700, but your statement balance remains $500. To avoid interest, you only need to pay the $500 statement balance by February 5th. The remaining $200 will be part of your next statement balance.

Consistently paying your statement balance in full each billing cycle is the cornerstone of responsible credit card management. This habit not only prevents interest charges but also contributes positively to your credit score by demonstrating responsible repayment behavior. While paying down your outstanding balance can further reduce your debt and credit utilization ratio, it’s the timely payment of the statement balance that truly shields you from unnecessary interest expenses.

In essence, prioritize paying your statement balance by the due date. It’s the smartest way to leverage the benefits of your credit card without falling into the interest trap. Keeping track of your outstanding balance is still valuable for budgeting and spending awareness, but for interest avoidance, focus on that statement balance!