Understanding Credit Card Payments; Which One Should You Pay?

If you’ve been following us for some time, you should already know by now that we have always advocated the usefulness of credit cards. This is because if used correctly, a credit card can help you manage your finances.

However, as you’ve seen from the sentence above, it does come with a caveat. A credit card is a double-edged sword, it’s very useful if you know how to manage it correctly, but it can also cause serious damage to your finances if you don’t handle it properly.

Which is why in this article, we’re going to help you manage your credit card properly; by helping you understand which balance you should pay off first on your credit card.

Understanding your credit card statement

So the first and perhaps most important step to understanding your credit card better, is by understanding your credit card statement.

Here’s an example of a credit card statement;

In this statement, the most important thing for you to understand is four sections on top of the statement. Here, you can see four things;

• Statement date,
• Payment due date,
• Minimum payment due, and
• Combined credit limit

Let’s explore what these four things actually mean.

Statement date

The statement date is when your credit card statement is issued every month. 

This means that any spending on your credit card starting from the previous statement date to the day before the current statement date will be included in your current statement.

So for example; if a credit card statement’s statement date is on the 28th of each month, the statement will contain all the charges made on your credit card from the 28th of the previous month, to the 27th of the current month.

Payment due date

Between the two, the payment due date is the simpler one to understand.

The payment due date is the date before which you have to make your credit card payment. If you don’t make your credit card payment before the payment due date, you will be charged with something called the late payment charge.

The late payment charge differs for each credit card. You will have to check with your credit card provider for the details of the late payment charge.

Minimum payment due

The minimum payment due is the amount you have to pay each month. If you do not pay at least the minimum amount, you will be levied a late charge by your credit card provider.

We’ll talk more about this later on in the article.

Combined credit limit

A credit limit is the maximum amount you can charge on your credit card, before your credit card gets declined. 

For example, if you have a RM5000 credit limit on your credit card, you can spend only a total of RM5000 on your credit card, before you have to make a payment on your credit card.

If you have two or more credit cards from the same credit card provider, the credit limit of the cards will be combined; hence the combined credit limit.

So now that we understand the four top sections that you need to know on your credit card statement, let’s have a look at the typical balances a credit card will have.

Understanding the different types of credit card balances

Typically, a credit card statement will have three different types of payment options.

Different vendors will have different types as well, such as the previously mentioned combined credit limit, previous balance, interest, and total balance due.

But for the purpose of this article, we’re going to be talking about these three types of payment options.

These three payment options are ;

• Statement balance
• Outstanding balance
• Minimum payment 

Here’s what these three balances actually means;

Statement balance

The statement balance, also known as the current balance, actually records the amount of money that is charged to your credit card for your current credit card statement.

So let’s say for the statement date of 28th July 2023, your credit card statement balance is RM3500. This means that for the past month that is included in that statement, you have spent RM3500 on your credit card.

One important thing to note about this is that when you make your credit card payment, and you pay off your statement balance, the displayed statement balance in your banking app will not be reset to zero, even if you’ve paid the whole amount.

This is because the displayed amount is to display how much you’ve spent using the card for the current statement period. It doesn’t reflect the payment status.

So even if you’ve paid your whole statement balance and you still see the big number staring at you on your screen, don’t worry.

Outstanding balance

Then if that’s the statement balance, what does it mean by the outstanding balance?

The outstanding balance is simply the amount you owe the bank. So when you make a charge on your credit card, the amount will be reflected on your outstanding balance.

This also applies to when you make payments on your credit card. The amount you pay will be deducted from your outstanding balance.

The outstanding balance will also reflect the amount that you haven’t paid from your statement balance. If you did not pay the statement balance in full, the leftover amount will be reflected in the outstanding balance

Here’s an example;

Ali has a credit card with credit card provider A. Ali’s credit card has a statement balance of RM3000.

Ali makes a payment of RM1500 for this month. This means that Ali’s outstanding balance will be shown as RM1500.

What’s the difference between outstanding balance and statement balance in the section above? Simply put, the outstanding balance is the total amount you owe. The statement balance shows only what you owe when the last billing cycle (usually 28 days) ended.

Minimum payment

And finally, the minimum payment is the amount that you have to pay every month. If you pay less than the minimum payment amount, then you can be charged with late fees as well.

Usually, the minimum payment is calculated as a small percentage of your credit card balance, often 1% to 4%, or a predetermined fixed amount, whichever is higher.

So, now time to answer the million dollar question – which balance do I pay off?

Paying off specific balance

Before we can determine which balance you should pay off, first we need to know what happens when you pay off a specific balance.

So here’s what will happen when you pay only one of these balances.

Statement balance

When you pay your statement balance, it means that you are paying off all your credit card purchases or charges made on your credit card before the date that statement was prepared only.

This means that if you have spent on your credit card after the date the statement was prepared, it will be reflected in your outstanding balance.

Outstanding balance

Paying off the outstanding balance on your credit card basically means that you are paying off your credit card in full. This means that you will no longer owe the credit card anything, as you’ve paid everything off.

Minimum amount

Now if you only pay off your minimum amount on your credit card, you are the banks’ favorite type of customer.

This is because when you pay off only your minimum amount, you are actually making very little progress towards clearing your credit card debt. If your debt is high enough, chances are that you’re only paying off your interest.

So which one should you pay?

So now that we’ve clarified what happens when you pay off all the balances, which balance should you be paying off?

To be honest, the answer to this question depends entirely on you, and your needs. 

Obviously, paying off the entire outstanding balance every month will be the best choice as it will completely pay off your debt and there will not be any unpaid balances left.

However, asking everyone to pay off their entire credit card debt can be quite unrealistic. Besides, you can take advantage of the grace period to ‘float’ your charges made after the statement balance. Paying the statement balance also means you get to enjoy the grace period interest free.

This why some people choose to slowly work through their debt by paying off their statement balance monthly. The downside is that you have to remember you still have some unpaid charges to pay at the next statement balance cycle.

But one thing’s for sure – whatever you do, try and avoid only paying off your minimum payment!  All it will do is increase the amount you have to pay in interest.