There are many benefits to using a credit card for your business needs. But when it comes to your business payments, you want to be extra careful and make sure you pay what you owe, and on time. It’s also crucial for your business to keep a high credit score.
In order to do both, it’s important to understand how your credit card payments work and specifically the difference between your statement balance (or amount due) and your current balance (or balance total). They may be equal or one might be higher than the other. We’re here to clarify what’s the difference and why this is happening. Let’s dive in.
What’s a statement balance?
A statement balance is the amount due at the end of the billing cycle, which could be anywhere between 15 to 60 days, depending on your credit card issuer. It’s the sum of all the purchases you made, your fees, interest, and unpaid balances.
Once it’s calculated, the statement balance remains the same until the end of the next billing cycle.
What’s a current balance?
Unlike your statement balance, the current balance is updated constantly. It’s a sum of all charges, interest, credits, and payments made with your card. it reflects the real-time credit card balance. So, as soon as you pay your statement balance, your current balance will reflect your new billing cycle. And if you didn’t pay your statement balance in full, the remaining balance will appear here as well.
A quick look at your billing cycle
To better understand all of this, let’s take a look at your billing cycle and understand how it works.
The statement date
Once a month, your card issuer compiles all of your account activity and generates a statement. The day this happens is your statement date, also called the closing date.
The due date
This is the date by which you must pay at least the minimum amount due. The due date is usually about three weeks after the statement date.
The reporting date
This is the date on which the card issuer reports your balance to the credit bureaus. The reporting date does not appear on your bill and could be any time during the month, usually around the time of your statement date.
Why your statement balance is different than your current balance
Depending on how you use your credit card, your two balances may be the same or one may be higher than the other. The main reason for the difference between them is that your current balance is continually updated, while your statement balance is a record of your balance on a given date.
Let’s say your card’s billing cycle is between April 15th and May 15th. During that time, you spent $4,000 on purchases. This means your statement balance as of May 15th will be $4,000. On May 16th, you make a purchase of $500 on the card. Your statement balance will still read $4,000, but your current balance will be $4,500 because that’s the total amount you currently owe.
Should you pay your current balance or your statement balance?
Generally speaking, you can pay your statement balance in full at the end of each billing cycle or you can pay partially and carry an interest charge. You can also pay your current balance at any given time.
But how do you decide if you should pay your current balance or your statement balance? The answer to this question really depends on your business needs.
It’s always a good idea to pay at least the minimum amount of your statement, to maintain a high credit score and avoid late fees.
If you pay your statement balance in full, you won’t have to pay interest charges and you’ll potentially enjoy all the benefits of your credit card.
But whether you should pay your current balance in full or not depends on a few factors you should take into consideration.
Credit utilization ratio
Your credit utilization ratio, which is the amount you owe as a percentage of your credit limit, may affect your credit score. Let’s say you have a $10,000 credit limit and your balance is $3,500. Your utilization is 35%.
The lower your utilization, the better, and if it’s over 30%, it could be damaging to your credit scores. So you should really consider paying early whenever your credit utilization nears that 30% mark, regardless of when your bill is actually due.
Having a high credit score is important if your business is seeking a loan.
Another important thing to take into consideration is your cash flow. That’s the measurement of the flow of cash in and out of your business. When more cash is coming in than going out, it’s known as positive cash flow.
When the outgoing cash exceeds the incoming cash, it’s called negative cash flow. When paying with your credit card, you can defer the payment until the end of the billing cycle, giving you more cash on hand if you need it.
But remember, any amount not paid on your statement balance by the due date will roll over to the next month and start to accrue interest and possibly finance fees. This could also hurt your cash flow so you need to act wisely.
There are no right or wrong answers here. It all depends on what’s important to you right now. You might have a low credit score, but be in need of cash and choose to delay the payment. Other businesses might want to improve their credit scores and focus on that for the time being, even if cash flow is currently negative. It’s really up to you to decide.
Stay on top of credit card expenses
Both your statement balance and current balance give you a good idea of where your expenses are at any given moment and can give you a window into your financial state. No matter which you pay and when, it’s important to utilize your credit card to your own advantage. As always, staying on top of your finances is extremely important for any business–small or large. And keeping track of your credit card spending is key.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.