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What Happens During a Credit Card Billing Cycle

Understand the Credit Card Billing Process


It can take years of using credit cards to understand just how they work. Even after you understand the basic credit card features, you still might not know how they affect you. Read on for an explanation of the credit card billing process from start to finish.

Credit Limits and Available Credit

Your credit card issuer gives you acredit limit based on your credit history, your ability to repay, and the credit card itself. During a billing cycle, you can charge up to your credit limit without receiving any penalty. If you charge more than your credit limit, you may be charged an over-the-limit fee. Before you can be charged a fee, you must opt-in to having over-the-limit charges processed. Otherwise, those charges will be declined.

As your balance increases, your available credit decreases. For example, if you have a credit limit of $300 and make a $100 purchase, your balance is now $100 and your available credit is $200 ($300 - $100).

Billing Cycles and Billing Statements

At the end of each billing cycle, a billing statement will be mailed to you. Billing cycles typically range from 25 days to 31 days, but can be shorter or longer depending on your credit card.

Your statement will include the balance at the beginning of the billing cycle (what was carried over from the previous month). It will detail credit card charges and payments as well as credits and fees in the current billing cycle. Fees and charges are added to the balance from your previous billing cycle, while payments and credits are subtracted to come up with your current balance.

Finance Charges and Grace Periods

If you carry a balance from the previous billing cycle, a finance charge will be applied. The finance charge is calculated using the annual percentage rate and one of five methods: average daily balance, previous month's balance, adjusted daily balance, ending balance, or daily balance.

If you did not carry a balance from the previous billing cycle, you'll have the opportunity to pay your full balance within the grace period and avoid a finance charge. (Some transactions, like cash advances, don't get a grace period.) If you don't pay your balance in full, your next billing statement will include a finance charge.

Minimum Payments and Late Fees

You must make the minimum payment listed on your billing statement before the payment due date to be considered "current," meaning you are not late on any credit card payments.

Typically, the minimum payment is calculated as a percentage of your credit card balance. If you pay less than the minimum or you make the payment after the due date, your payment is considered late and you will be charged a late fee. When you are more than 30 days late, the late payment notice is added to your credit report.

When you make a credit card payment, the amount is subtracted from the balance. Your balance decreases and your available credit increases. So, if your balance is $200, your credit limit is $300, and you make a $50 payment, your balance goes down to $150 and your available credit increases to $150.

The Credit Card Process Ongoing

Keep in mind much of this process applies to revolving credit cards rather than charge cards.

As you make charges and payments with your credit card, your balance and available credit will go up and down. Pay attention to your billing statement for minimum payment and date due. To keep good credit you should make at least the minimum payment each month and stay well below your credit limit. If you're unsure of your credit limit, you can check it before making a purchase by calling the number on the back of your credit card.

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