Article updated by Brian Acton June 20, 2018
Unlike most monthly bills, credit card payments give you the ability to decide your payment amount, letting you pay multiple ways. The right way to pay your credit card depends on your budget and financial goals, and you might even switch up strategies month-to-month. But before you determine which payment method is right for you, you need to understand all your options.
Most credit card companies let you make payments using the following four methods.
Making the Minimum Payment
What it Means: For every billing period, your card issuer will set the minimum amount you must pay to keep your account in good standing. The minimum payment is usually a small portion of your overall balance. If you don’t make the minimum payment, your issuer may charge a late fee, impose a penalty interest rate, and even report the delinquency to the credit bureaus, which can hurt your credit score (most creditors won’t report a missed payment to the credit bureaus until it’s at least 30 days late).
What You Should Know: You must make at least the minimum payment if you wish to keep your account in good standing and avoid negative consequences. If you are having trouble paying your bills, paying the bare minimum can help get you through the month.
However, you should always try to pay more than the minimum. If you rack up too much credit card debt, your minimum payment could increase to the point that it becomes unaffordable. And if you only pay a small portion of your credit card balance every month, your credit card balance could easily balloon out of control. Finally, only making the minimum payment will cause interest to accrue on any purchases you haven’t paid off.
Other than not paying at all, making the minimum payment is your worst payment option. It’s not a long-term strategy, and you should only resort to it in times of emergency. If you do have trouble making the minimum payment each month, you should look for alternative ways to reduce your credit card debt.
Paying the Statement Balance
What it Means: Your statement balance is the total amount of charges made during your previous billing cycle, plus any outstanding balance that was already on the account. Paying the statement balance is also know as “paying in full,” and will eliminate any balance you have up to the beginning of your current cycle.
What You Should Know: If you always pay your statement balance, you can take advantage of the grace period between the end of the billing cycle and your bill date, during which your purchases for the previous billing cycle will not accrue interest.
This is one of the best ways to pay your credit card. It allows you to take advantage of the perks and conveniences of credit cards without going into debt or accruing interest on any balance you carry over. (Cash advances don’t usually come with a grace period, so check your credit card’s terms before you make one).
Always paying your statement balance requires smart budgeting, and only making purchases you can afford to pay off in full each month. If you have your credit cards et up to auto-pay, you should make sure you have enough money in your bank account to cover your previous billing cycle’s charges.
Paying the Current Balance
What it Means: Often confused with the statement balance, the current balance is actually the total amount of charges that have cleared your account to date and have yet to be paid. For example, your credit card’s current balance on day 15 of your billing cycle will include any balance left from previous cycles and purchases that have cleared within the previous 15 days.
In other words, the current balance is the most up-to-date version of your credit card balance.
What You Should Know: If you use your credit card frequently, your current balance will probably differ from your statement balance. That’s because your current balance is completely up to date.
Paying your current balance is another one of the best ways to manage your credit card. It conveys all the benefits of paying your statement balance (e.g., avoiding interest) but also zeroes out your credit card balance up to the date you pay. It also requires careful budgeting and paying attention to your spending habits so you have enough at any given time to pay your current balance.
Remember, current balances will not include any pending charges that haven’t cleared yet.
Paying a Custom Amount
What it Means: You can pay any amount you wish, whenever you want (provided your credit card issuer allows it).
What You Should Know: There are many reasons to pay a custom amount. Maybe you want to pay more than your minimum payment, but you can’t afford to pay the entire statement balance. Or maybe you like to pay a little bit at a time, several times throughout the month, whenever you can.
If that describes you, custom amounts are a good way to pay, as you can login to your account and make a payment that fits your current situation. Just don’t lose track of when your payment is actually due, or you could accidentally pay late or accrue interest on charges you intended to pay off.
The right way to pay your credit card depends on your financial situation, budgeting preferences, credit score goals, and debt strategy. But remember, to completely avoid interest and keep your balances low, you need to pay off the statement balance or current balance every billing cycle; this is the best way to use a credit card to your financial advantage. If you have trouble making your payments, it may be time to set a budget and reduce your credit card spending.
Keeping a low balance and making timely payments will also help you build credit. You can see how your credit cards are impacting your credit scores for free at Credit.com.
More on Credit Cards: