Proper sublime handling of complex financial instruments as credit cards necessitates a greater understanding of their functions, as well as their working process. While one can very conveniently employ their credit cards to secure several spendings, the accompanying technicalities can be very complex to understand. Various hidden costs, late payment fines, interests, due dates etc.
can push anyone into a realm of utter confusion. These confusions mostly lead to the cardholders missing out on vital information, and they suffer heavy losses. Hence, it is imperative that one thoroughly inculcates the facts and procedures linked with credit cards in mind.
“How does credit card billing work?”, is one such question that often does the rounds in the subconsciousness of both the financially aware individuals as well as the newbies. Clear all the doubts and queries clouding your minds regarding the billing cycle, billing date definition, and various charges through this wholesome and all-inclusive guide.
What is the billing cycle?
The credit card billing cycle is the period for which the credit card bill, commonly called the credit card statement, is effectuated. All the transactions realized by employing credit cards in different avenues during this period are accounted for in the billing cycle.
The billing period differs from card to card and from one financial institution to another. It may range anywhere between 27 and 31 days, as determined by the bank. For instance, a billing cycle initiating on the 15th of any month can continue till the 14th of the succeeding month. Every other expenditure entailed through the credit during this particular period gets reflected in the next billing statement.
Credit cards billing cycle and the methodology involved
The day the billing cycle initiates, the credit card gets activated. At the outset, the money owed to the bank is usually nil except in certain cases. There may be some introductory charges such as the joining fee. Another instance when the initial amount is not zero is when the balance is rolled over from the previous month on non-clearance of bills.
During the course of the billing cycle, every object bought or services enjoyed on credit get included in the bill. In case of any available discounts or tax waivers, the amount gets deducted from the resultant total. On the last day of the billing cycle, referred to as the billing date, the credit card statement is furnished to the cardholder. This statement throws light on every single expenditure made possible using the credit card.
The billing date definition goes something like this. It is the last day of the billing cycle; the billing date is the day on which the credit card statement is sent to the customer. The bank thus provides to its customer a well-compiled and detailed document. This document should be thoroughly scrutinized and analysed, and then the planning should start to pay off the money owed before the due date.
What does one understand by the Minimum Amount Due and the Total Amount Due?
To properly understand the mechanism of the billing cycle, two terms that must be mandatorily known are the Minimum Amount Due and the Total Amount Due. The bank fixes a due date– the deadline for settling the amount indebted to the bank.
This due date is generally set at about 3 weeks from the billing date. The phase between the billing and the due date is the grace or interest-free period. If there’s no unsettled balance from the previous cycle, no interest is incurred during this grace period.
Once the due date is known, a tab must be kept on both the Minimum Amount Due and the Total Amount Due. Except in case of a financial crisis, the minimum amount should be ignored as it is the least amount of money that the bank asks the customer to repay.
Fixed at just about 5% of the Total Amount Due, the minimum payment is just the tip of the iceberg– the settling of which wipes off the late payment fine and augmented interest rates. Clearance of the minimum amount is necessary to keep the credit card valid and the credit score healthy.
The Total Amount Due is thus the amalgamation of all the expenditures, finance and other charges wherever applicable. Interest gets charged if the customer defaults in settling the total amount in full and the money rolls over to the following cycle.
Charges accompanying credit cards
One should be thoroughly informed of all the charges that can be incurred on their credit card. The most common is the interest charged on the outstanding balance. It can be calculated monthly or annually (Annual Percentage Rate). Besides the rolled over amount, any further transaction made through the credit card comes under the purview of this interest until the amount is settled.
A late payment fee is collected if there’s any default in paying off the minimum amount due. There are credit cards that also attract an annual fee or renewal fee. Moreover, on cash withdrawals using the credit card, a cash advance can be charged. A fine is also incurred on surpassing the credit limit.
