What Happens During a Credit Card Billing Cycle?
It can take years of using credit cards to completely understand how they work. Even after you understand the basic credit card features, you still might not know how they affect you. Read on for an explanation of the credit card billing process from start to finish.
Credit Limits and Available Credit
Your credit card activity is broken up by billing cycles, which is simply the period of time between your credit card billing statements. During a billing cycle, you can make purchases, balance transfers, and cash advance transactions up to your credit limit without receiving any penalty. However, if you charge more than your credit limit, you may be charged an over-limit fee depending on the terms of your credit card. However, before you can be charged an over-limit fee, you must opt-in to having over-limit charges processed. Otherwise, those charges will be declined.
As your credit card balance increases, your available credit for making new purchases decreases. For example, if you have a credit limit of $300 and make a $100 purchase, your balance is now $100 and your available credit is $200 ($300 - $100). When you make a payment or receive a credit to your account, it lowers your balance and raises your available credit.
Billing Cycles and Billing Statements
At the end of each billing cycle, a billing statement will be mailed to you. Billing cycles can range anywhere from 28 days to 32 days, but can be shorter or longer depending on your credit card.
Your statement will include the balance at the beginning of the billing cycle (what was carried over from the previous month). It will detail credit card charges and payments as well as credits and fees made to your account during the billing cycle. Fees and charges are added to the balance from your previous billing cycle, while payments and credits are subtracted to come up with your current balance.
Finance Charges and Grace Periods
If you carry a balance from the previous billing cycle, a finance charge will be applied. The finance charge is calculated using the annual percentage rate and one of five methods: average daily balance, previous month's balance, adjusted daily balance, ending balance, or daily balance.
If you did not carry a balance from the previous billing cycle, you'll have the opportunity to pay your full balance within the grace period and avoid a finance charge. (Some transactions, like cash advances, don't get a grace period.) If you don't pay your balance in full, your next billing statement will include a finance charge.
Minimum Payments and Late Fees
Your credit card issuer will only require you to pay a small percentage of your balance each month. (The exception is with charge cards where you must pay the full balance or be charged hefty fees or interest.) The lowest payment you must make is the minimum payment. The amount of your minimum payment will be listed on your billing statement and must be made before the payment due date to be considered on time.
Typically, the minimum payment is calculated as a percentage of your credit card balance. If you pay less than the minimum or you make the payment after the due date, your payment is considered late and you will be charged a late fee. When you are more than 30 days late, the late payment notice is added to your credit report and your account is considered past due. You'll have to pay the full minimum payment, which will probably include a late fee, to bring your account current and in good standing again.
When you make a credit card payment, the amount is subtracted from the balance. Your balance decreases and your available credit increases. So, if your balance is $200, your credit limit is $300, and you make a $50 payment, your balance goes down to $150 and your available credit increases to $150.
The Credit Card Process Ongoing
As you make charges and payments with your credit card, your balance and available credit will go up and down. Pay attention to your billing statement for minimum payment and date due. To keep good credit, you should make at least the minimum payment each month and stay well below your credit limit. If you're unsure of your credit limit, you can check it before making a purchase by calling the number on the back of your credit card.
GE Credit Union. "Over-the-Credit Limit Coverage Consent," Accessed Nov. 18. 2019.
Experian. "Should I Pay My Credit Card Bill Early?" Accessed Nov. 18, 2019.
Discover. "How to Handle Credit Card Payments Like a Boss," Accessed Nov. 18, 2019.
myFICO. "How to Avoid Paying Credit Card Interest," Accessed Nov. 18, 2019.
Digital Federal Credit Union. "Calculating Finance Charges," Accessed Nov. 18, 2019.
Consumer Financial Protection Bureau. "CFPB Consumer Laws and Regulations Truth in Lending Act," Page 20. Accessed Nov. 18, 2019.
Federal Trade Commission. "Credit, Debit, and Charge Cards," Accessed Nov. 18, 2019.
Experian. "How Is Your Credit Card Minimum Payment Calculated?" Accessed Nov. 18, 2019.
Equifax. "When Does a Late Credit Card Payment Show Up on Credit Reports?" Accessed Nov. 18, 2019.