Should you pay outstanding balance or statement balance?

Statement Balance vs. Outstanding Balance: Which Should You Pay?

The difference between paying your statement balance and your outstanding balance on your credit card can seem subtle, but understanding the distinction is vital for managing your finances and your credit score. Both relate to the amount you owe, but they represent different snapshots in time, leading to different consequences.

Your statement balance is the total amount you owe as of the closing date of your billing cycle. This is the number printed prominently on your credit card statement. Paying this amount in full by the due date is the key to avoiding interest charges. Failure to do so means you’ll accrue interest on the remaining balance, quickly increasing your debt.

Your outstanding balance, on the other hand, is a dynamic figure that reflects your balance at any given point during your billing cycle. This is the running total of your purchases, minus any payments you’ve already made. It’s constantly changing as you make transactions and payments. While paying down your outstanding balance before the billing cycle ends isn’t required to avoid interest, it offers several advantages.

Why pay your statement balance in full?

The primary reason to pay your statement balance in full is to avoid interest charges. Credit card companies calculate interest based on your outstanding balance at the end of the billing cycle – your statement balance. Paying this amount eliminates interest, preventing the snowball effect of accumulating debt. This saves you considerable money in the long run.

Why pay down your outstanding balance?

While not mandatory for avoiding interest, reducing your outstanding balance throughout the billing cycle offers these benefits:

• Improved Credit Utilization Ratio: Your credit utilization ratio is the percentage of your available credit that you’re using. A lower ratio is better for your credit score. By paying down your outstanding balance frequently, you keep your utilization low, signaling responsible credit management to credit bureaus. Regularly paying down your outstanding balance can significantly improve this ratio, even if you don’t pay the statement balance in full each month.

• Reduced Stress: Seeing a smaller outstanding balance can ease financial anxiety. Knowing you’re consistently making progress on your debt can be psychologically beneficial.

• Flexibility: Paying down your outstanding balance provides greater flexibility for unexpected expenses. If an unforeseen cost arises, having a smaller balance means you have more readily available credit.

In Conclusion:

Paying your statement balance in full by the due date is paramount for avoiding interest charges and maintaining good financial health. However, regularly paying down your outstanding balance throughout the billing cycle provides additional benefits, impacting your credit score positively and offering greater financial control. Aim to do both for optimal credit card management. The ideal scenario is to keep your outstanding balance as low as possible and pay your statement balance in full every month.