How to Understand Your Credit Card Statement

How to understand your credit card statementIf you’re anything like us, getting a credit card statement in the mail probably doesn’t rank very high on your list of pleasant experiences.  Do you carefully examine yours when it arrives?  Or do you just look at it long enough to see the two most important numbers — the total balance and the minimum payment due — and then toss it to the side?

If so, you’re likely to see the statement as a scary thing.  It makes sense that those two numbers can give you a sense of anxiety.  But that’s not a very helpful emotion, so below we’ll walk through each section of your credit card statement and explain what it means for you and your financial picture.

By seeing the piece of paper (or pixels, if you’re viewing it online!) as a source of information, you’ll empower yourself to respond more proactively to it rather than letting it simply be a reminder of your debt burden.

Let’s start with the most eye-catching part of the statement, which shows how much money you owe and how much you can spend:

1) Credit Limit – Current Balance = Available Credit

This is the part of the statement that we’re all pretty familiar with because we’ve looked at it so many times:

Obviously, your credit limit minus your current balance equals the amount of credit available to you.  But don’t forget to check the dates of your billing cycle, because if you don’t, you might think you still have $215 in your account to go buy a new pair of shoes with, when in reality you might have already spent $200 in the time that your statement was being mailed to you — meaning that despite what it says on the statement you actually have only $15 of available credit left.

This same section also shows the amount of your last payment, as well as any credits to your account or fees that have been charged to you, so it’s a good overview of where you stand.  We’ll discuss fees in a moment, but for now let’s move on and talk about…

2) The Most Misleading Number:  Minimum Payment Due

When you got a credit card statement for the first time, you probably thought the “Minimum Payment Due” is a number that’s calculated to help you pay off your debt in a reasonable period of time.

Unfortunately, it’s actually kind of the opposite.

It’s a number calculated by the credit card companies that is intended to keep you paying interest to them basically forever.  What?  How can they make you pay interest forever if you’ve only got a few thousand dollars in credit card debt?  It sounds crazy, but it’s made possible by that little thing called compound interest.

As interest gets continually added onto your total balance, you eventually start paying interest on the interest.  And then you start paying interest on that interest, too! Doesn’t that sound fun?

All joking aside, you will be much better off if you make a plan to eradicate your debt by paying more than your minimum payments every month.  You definitely won’t regret it.

Speaking of regret…

3) Beware the Curse of the Late Payment

We all know that making a late payment is baaaaad.  You get charged a penalty fee and your credit score can get dinged.  But what’s sometimes less obvious is the dramatic impact it can have on your interest rates.  Credit card companies frequently hit you with ridiculously high interest rates (as in the example above) if you make late payments — sometimes even after the first one.

While the $25-$50 fee might catch your attention at that moment, the increase in your interest rate — probably indicated in fine print somewhere — will have a much bigger negative effect on your long term finances.

Imagine if you made two late payments in back-to-back months.  As a penalty, your credit card company charges you late fees totaling $70 and raises your APR from 14% to 28%.  If you have a balance of $5,000, that higher interest rate could cost you as much as $3,000 total and it could take you up to three years longer to pay off the entire balance.

Talk about a costly late payment penalty!

4) Compare Your Options + Make a Plan

Just as it’s important to pay attention to late fees and penalties, you should also pay attention to this box that credit card companies are now required to put on your statement:

As we discussed above, making only minimum payments will lead to you paying much more money to your credit card company than what you originally owed, thanks to compound interest.  In the example above, simply paying a slightly higher amount each month ($62 instead of $53) would save you $1,052 and you’d completely pay off your balance in three years rather than ten years.

Now that the law requires this information to be presented in a clear and concise way on each statement, those of us here at ReadyForZero are hoping more people will save money by paying above their minimum payment each month.

5) Get Intimate with Your Interest Rate

Another way you can save money is by closely keeping track of your interest rate. Credit card companies are notorious for increasing interest rates at the drop of a hat — which means you need to stay vigilant.  Watch this section on your statement to verify that your interest rate stays the same:

changes to your credit card interest rate

If you see any changes to this section that are unexpected or wrong — especially if they relate to your interest rate — you should call your credit card company immediately and get things sorted out.

In fact, we’ve written previously about the benefits of calling your credit card company to ask for a lower interest rate.  If you haven’t yet, read the article and try it out!

Hopefully this overview will help you understand your credit card statement and will make you more likely to use it as source of information when it gets delivered to your mailbox (or e-mail inbox) next month.  Remember, the more proactive you are in managing your debt, the more likely you are to successfully pay it off in a short period of time.

This article is part of our Credit Card Debt Resource Center.  If you’re looking for additional information about credit card debt, be sure to pay a visit!

Image 1 credit: xJasonRogersx

Other images courtesy of FederalReserve.gov

 

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