FINANCIAL FRESHMAN #018
TL;DR → Your credit card statement gives you a snapshot of your spending, your payments, and the impact you can expect your minimum monthly payment to have on your overall balance. Understanding your billing cycles, due dates, and how interest accrues is imperative to effectively taking advantage of credit.
Introduction
CBS News published an article a few weeks ago that addresses a scary reality. In a poll of over 3,500 adults in the United States, about 2 in 5 had a credit card that was maxed out. We’re very pro-credit card on this blog, and we’ve even written articles about what effective credit card use looks like.
Depending on your financial situation, using a credit card effectively may not be a very easy thing to do. As Caleb Hammer often highlights on his popular podcast Financial Audit, there’s a fine line between taking advantage of credit cards, and credit cards taking advantage of you. Effective credit card users (ones that Caleb affectionately calls “credit card people”) have figured out how to stay on the right side of this equation.
To us, using credit cards effectively starts with understanding how they work, as well as the cost of using the credit that you’ve been given access to. In this post, we’ll give you all the basics needed to understand your credit card statements and how interest gets applied to your balance. Strap in, it can get confusing.
Anatomy of a Credit Card Statement
To begin highlighting some key credit card vocabulary, let’s take a look at of one of my recent credit card statements. On these statements, I’ve annotated information we’ll need with colored numbers. Your statements will certainly look different, but will contain all the same information.
#1 → At the top of my statement, we can quickly see my statement period. Often referred to as a “billing cycle,” this tells us that everything on this statement happened between 9/7/24 and 10/7/24.
#2 → In the upper-right, I can gather some specific information about my payment. From here, I know that my payment is due on the first of November, that my minimum monthly payment is $25, and that I ended this billing cycle with a balance of $513.09.
#3 → Many credit card statements will show a table that looks like this, called a minimum payment warning. This shows me that, if I were to only pay my $25 minimum going forward, my $513.09 balance would cost me $632 to pay off. We’ll do the math in a bit to make sure we know where this number is coming from.
#4 → This account summary section highlights my account activity over this billing cycle, effectively itemizing the $513.09 balance. It shows me the balance that I owed when this billing cycle began ($242.68), how much I paid toward this card over this billing cycle ($1,556.81), and how much I spent on this card over the same period ($1,827.22). Any applicable interest or fees I’m subject to would also be applied here. Since I was not charged any interest, the math here is very simple ($242.68 – $1,556.81 + $1,827.22 = $513.09).
#5 → Beside my account summary, this statement shows me my credit limit, cash advance limit, and how much of those limits remain available at the time of this statement. Subtracting your statement balance from your credit limit should equal your available credit, but it’s common for pending payments or purchases to create a slight discrepancy.
#6 → On the second page, this transactions section simply itemizes my payments toward this card over this billing cycle. This sum matches the total provided in #4.
#7 → The transactions section continues onto the next page of this statement. Here we see all the purchases that took place over this billing cycle, totaling the same amount shown in #4.
#8 → On the final page of this statement, we see a summary of interest charged. If there was interest charged in #4, this is where those figures would be shown. This section also tells me my APR on this card, which is 19.90% for purchases.
All of these variables together explain how I can pay nothing in interest on this credit card. If I pay off $513.09 by my statement due date of 11/1/2024, then I am good to go.
Calculating Accrued Interest
Using all of the information provided on this statement, let’s zoom back in to the minimum payment warning shown beside #3.
Understanding where $632 comes from starts with calculating a monthly interest rate from our credit card’s APR. When we divide 19.90% by 12 months, we know that we’ll accrue 1.658% in interest on a monthly basis. Each month, we can calculate an interest charge using this rate. The ledger would look something like this.
To get the ending balance, it’s as simple as adding the interest and subtracting the minimum payment. We see that after 24 months, our next minimum payment of $25 will successfully wipe out our balance. We can also see a total interest charge of $119.22 over these 2 years, which gives us a total cost of $632.31 ($513.09 + $119.22). These figures match those provided on our credit card statement.
Final Thoughts
While the table above illustrates how interest accrues with a fixed balance and no new purchases, the reality is that most credit card users will experience fluctuations in their balance due to ongoing spending. To account for this, credit card companies will employ something called the “average daily balance” method.
We’ll cover that next week. Subscribe below to join us on our quest to make you a credit card person!
