What is a Credit Card Balance?

Whether you're new to the credit card game or not, you might have a question or two, and one of the most common is, “What is a credit card balance?” Each consumer might have a different idea of the answer. In fact, different companies may also have varying definitions as well as different ways of calculating and presenting credit card information.

When it comes to your finances, it’s important that you ask questions if you are unsure and make sure you are diligent about examining the terms and conditions, so you know exactly what you are paying for when you use a credit card. This is one of the most important parts of your credit, so it pays to become familiar with each of the elements, including credit card balances.

General Credit Card Balance Info

Generally speaking, your credit card balance is usually the amount you are to pay in order for your account to be considered paid in full. However, that balance can change from day to day and in some cases, the day that you make your payment can determine the amount of your balance. For instance, accounts that are based on an average daily balance may have a lower total if you make your payments at the beginning of the month as opposed to the end of the month, even if the payments are exactly the same.

Your balance also has a significant impact on your credit score. It doesn't just tell lenders how much you owe altogether; it also allows them to compare how much credit you're using as compared to how much credit you have.

So, if you have a balance of $100 on an account with a $1,000 limit, it looks far better than a $100 balance on a card with a $300 limit.

When you learn to calculate what you owe and need to pay, you can adjust how and when you use your credit for the best possible outcome on your credit report.

Understanding Your APR

When you look at your credit card terms, you may see a section referencing the APR or the Annual Percentage Rate. This doesn't mean your balance is calculated on an annual basis, although that would make a significant difference in the amount you pay. Instead, it means is that for the year in question, it the amount of your percentage rate. However, you can calculate your daily interest based on this rate, because yes, it is figured daily and because your balance changes, the interest also changes based on the balance and the APR.

To figure out your exact APR, find out whether they use the 360 day or 365-day method. Then, divide the APR by that number. So, if your APR is 21 percent and the card issuer or bank uses the 365-day method, your interest rate is about 0.06 percent per day. You can multiply this number by your balance each day to figure out how much interest will be added to your balance on a daily basis.

Average Daily Balance

Average daily balance is determined by when you make your payments. If for instance, you begin the month with a balance of $1,000 and there are 30 days in the month, you make a payment of $100 on the 3^rd and another payment of $500 on the 15^th.

In this example, for the first two days, your balance was $1,000, but because you need to get an average, you add all the days together. This means that you will have 2 x $1,000 plus the remaining days. On the third day, your balance was $900 because you paid $100. It remained there until the fifteenth, so you'll have 12 x 900. On the 15^th, you paid $500, so your balance dropped to $500 for the remainder of the month, giving you 16 x $400. This is calculated by adding according to the calculation shown below.

• (2 x 1000)+(12 x 900)+(16 x 400)=2000+10800+6400=19,200 and since there are 30 days in that month, you divide 19,200 by 30 and get $640 as your average daily balance for the month.
• Multiply that by your interest rate to calculate the amount of interest.
• Add your interest to your balance and you will get your total balance.

That's why it pays to make the bigger payments at the beginning of the month. If you switch around the payment made on the 3^rd and the 15^th, you have the resulting formula below.

• (2x1000)+(12x500)+(16x400)=2000+6000+6400=14,400 Divide it by 30 and your average daily balance is $480, a much smaller number to accrue interest with.

How to Use Your Balance

Obviously, if at all possible, you want to get ahead on your payments, which will always apply to the interest first. If your interest is $100 and you pay $120, the principal will only decrease by $20. That means even paying just $5 more can make a huge difference in the amount of time it takes to pay down your balance. This is especially true in instances such as the one mentioned above. If you're paying bills with your credit cards, but you have the cash in hand, apply it to your credit cards before you pay your bills so you can reduce the principal instead of adding to it and then taking off the payment.

As you can see, asking “what is a credit card balance” brings out more information than just a simple number. The shortest version is that it's your principal amount owed, plus the interest that has accrued up until that day. Note that your balance can change on a daily basis.

In almost every instance, it pays to make your biggest payment as soon as you can, adding to that later in the month if you choose to do so.

Avoid late payments if at all possible since some late payment fees are between $35 and $50, which can drastically change your principal and your interest.

If you're trying to figure out how to reduce your overall debt the fastest, try figuring out what your interest is on each card, then add it to the principal. Calculate how your payment will change those numbers and you'll find out which one will decrease the most and the fastest, with that payment. In some cases, depending on your interest and how it is figured, you may be surprised to learn that paying on the largest balance first isn't necessarily the fastest way to reduce your overall debt.

Christina Majaski More than 10 years experience covering credit cards and personal finance

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