Credit cards are a key part of most Americans’ financial lives, so it’s important to understand how they work. When it comes to credit card payments, you may already know that monthly payments are generally required if you’re using that card. However, understanding the ins and outs of what’s expected and how credit card interest works can help you better manage your payments.
Let’s explore how credit card payments work, what the balances on your account mean, when you can be charged interest and tips for getting out of credit card debt.
How do monthly payments on a credit card work?
When you have and use a credit card, you’re required to make minimum payments every month, often based on what you spent during your billing cycle. Typically, the minimum payment amount is a percentage of your balance (the amount you owe), or a fixed amount. If your balance is lower than the fixed amount, your minimum payment may be the full balance.
You must pay at least the minimum by the payment due date. You can pay more than the minimum — in fact, it’s generally best to pay off your full balance each month, if possible. That can help you control costs and potentially avoid paying credit card interest.
How do credit card balances work?
At the end of your billing cycle, you’ll receive your statement, either electronically or by mail. Your statement typically shows:
- Statement balance
- Transactions
- Interest and fees
- Minimum payment
- Payment due date
When you log in to your credit card account, you might see both a current balance and a statement balance. Your statement balance stays the same until your billing cycle is over, but your current balance reflects any charges (including interest, fees and purchases), payments and credits that have posted to date.
How does credit card interest work?
Most credit cards have a grace period, which is the time between when the billing cycle ends and your payment is due. During the grace period, you will not be charged interest on purchases as long as you pay off your statement balance by the due date.
If you carry a balance from 1 billing cycle to the next, however, you generally lose your grace period. That means you’ll be charged interest (usually daily) on the outstanding balance. There are exceptions to the grace period, including cash advances, which begin accruing interest immediately.
What happens if you pay your credit card bill late?
If you pay after the due date, or make a partial payment (which is anything less than the minimum amount due), your payment will be considered late. That can lead to a few consequences:
- Late fee: You may have to pay a late fee, which can vary by issuer.
- Penalty APR: Your issuer may impose a higher penalty APR on your account.
- Loss of introductory APR: If your credit card is currently in an introductory APR period, missing payments may mean losing your low intro APR.
Late credit card payments can also damage your credit since creditors may report them to the credit bureaus.
Signing up for autopay or setting payment reminders may help you avoid missing payments. Depending on your issuer, you may also be able to change your payment due date to better align with your finances.
