How Your Credit Card Bill Works and What to Pay Each Month

I had not thought of this as a topic since it’s a pretty small aspect of your overall credit profile, but I get asked this question so often, I figured other people might be wondering the same thing. Do you pay the “Last Statement Purchases” or “Outstanding Balance” when you pay your credit card bill each month?

The answer is you pay the “Last Statement Purchases” amount. Your credit card company may have different terminology for this, but essentially you pay the entire amount of purchases on the last full month’s statement.

For those of you who still pay paper bills, this is a LOT easier to understand, because all you see is this month’s statement. There’s no way to see the purchases you may have made for the last 1-29 days since your statement cycle ended. But, if you pay either through direct transfer from your bank account or some other online bill pay mechanism, this can be confusing, because the online app/software updates every few minutes.

Here is a sample of what you might see online when you look at your credit card on your bank’s website:

Payment Due 5/2/15

Balance Summary:

  • Total Credit Limit
  • Outstanding Balance
  • Available Credit
  • Cash Advance Limit
  • Available for Cash Advances
  • Last Statement Balance 
  • $11,000
  • $2,808.76 (balance as of THIS MINUTE)
  • $8,191.00 (Credit amount left)
  • $10,000 (we try NEVER to use this, right?)
  • $8,191 (they are really trying to get you to take cash advances)

You want to pay (based on our example) $1,460.98 by 5/2/15 to not incur ANY interest charges with your credit card company. You DO NOT, let me repeat, DO NOT have to pay “Outstanding Balance” to not incur any interest charges. Your credit card company does not assess interest charges on purchases made WITHIN the 30 cycle of your statement. It’s like a zero interest loan for the 5, 17, or 29 days your purchases from this current month are laying on your credit card bill.

I recommend that people only pay their Last Statement Balance for two reasons:

  1. Why not take advantage of a zero interest loan for however many days you have it
  2. You can throw off your cash flow for the month if you pay your Outstanding Balance (current and last 30 days purchases).

I think you probably understand reason number 1, but let’s take a minute on reason number 2. If you follow my plan or you use your own financial plan, you monitor what you spend EACH MONTH, not each 47.43 days or whenever it is you might randomly be paying off your Outstanding Balance. If you pay everything and you happen to go to your online account when you are, for example, 23 days into the month, your bill will be a lot larger than if you pay just your last statement.

In my example above it’s the difference between $2,808 and $1,460, which is $1,348. That’s not spare change. If you pay $1,348 a few weeks before you have to, you may be caught a little short before your next paycheck comes.

Pay your Last Statement Balance each month in full (we know you can, because you’re watching your full discretionary spending, right?) and do not worry about the rest. You can even set up a recurring payment to pay “last statement balance” with most banks. Then you do not have to think about it at all…