When it comes to your first credit card bill, you might be asking yourself, “how much do I need to pay?” or “should I pay extra?”. You might also be wondering when your payment is due and what the penalty is for paying late. Ideally, you should be familiar with all of these things before you go to pay the bill for your first credit card.
Often times you can pay your bill right online or mail in a payment. You should get a bill via email and/or snail mail that tells you your total amount due, which should include current fees and the principle you need to pay on your credit card. If you have the means, paying extra is always a good idea. If you pay late you will be smacked with a late fee and eventually it will go to collections, which is bad for your credit score. Let’s explore these concepts a little bit closer so that you know what to expect.
What’s Included in My Bill?
Your bill contains every charge you made to your account; every transaction in which you used your credit card. In other words, the amount of credit you have used: all the money you borrowed from your issuer by using your card, and which you now must pay back. However, there may be additional charges or fees that you didn’t incur just by shopping or spending with credit.
What’s the Deal With Interest?
When you take a look at your credit card bill it can be a bit confusing at first. You may see a total amount due that looks a bit different than what you initially charged to the card. That is because credit card companies make money by charging you interest on everything you spend using your card. In addition, there are fees tacked on top of your monthly charges.
For example, if you charged $25 to your card and are now looking at a total amount due of $35, it’s likely because your bank or lender has calculated your interest due to them in addition to a possible monthly or yearly fee. I suggest that you become familiar with any online banking options that you have. This way, you’ll be able to take a look at all charges on your card and keep track of them, as well as see a breakdown of exactly what your card payment is and why.
I should note that credit card companies do not usually charge interest immediately or preemptively, meaning that it usually takes an ongoing balance to rack up interest charges. In the scenario above, if you know you charged $25 to your card, you’d likely only see that interest appear after a month or more.
What Will My Bill Look Like?
Furthermore, it’s important to understand what you’re actually going to be charged. Credit card companies usually charge a minimum amount per month, usually $25 or so. When you log into your online banking system, you’ll see your total balance on the card and also how much the bank wants you to pay this month, which may be much lower than your actual total balance on the card. Keeping a balance on your card for an extended period of time is what will actually rack up interest charges in addition to your minimum payment.
If you’re not sure how much interest and fees you should be charged, take a look at your card information through your online bank. They may have the details listed there for you to see. You should have also gotten a copy of the agreement that you signed when you applied for the card. If you don’t have this information, reach out to your bank and ask them to give it to you. It’s important to be prepared and understand if what you’re paying is actually worth it in the end.
Your monthly bill will contain a detailed breakdown of any outstanding balances that haven’t been paid off yet. It will also show you every time your card was used on a new purchase and any interest that may have been added to your outstanding balance.
Part of this being “worth it” comes down to how you use the card as well. If you’re racking up charges left and right, you’re going to pay more interest, period. Longer sums of money are going to take longer to pay off, which means your card company can tack on interest each month until your total amount due is paid off in full. Not to mention, having a high balance interferes with your credit utilization ratio, which can stop you from being approved for new lines of credit, if the bank sees that you’re already having a hard time paying off what you’ve got.
How Much of My Balance Should I Pay?
Try to Pay Your Balance in Full
The best financial habit that you can get into, in regards to your credit card, is paying off all of your balance every month. Leaving a balance on your credit card is what ends up costing you interest. If you can manage to pay off the entire balance as quickly as possible, you’ll have to deal with little to no interest. However, if you can’t pay it all of every month, it’s best to pay off as much as you can comfortably afford.
Paying extra on your bill is a great idea. The reason this helps you out in the long run, is that you will have to pay less overall. Since interest is factored in on everything that you charge to your credit card, paying more than your minimum amount due will negate some of the interest that would have been charged based on your outstanding balance. As we discussed, having a high balance for extended periods of time means that you’ll be paying much more in the scope of things. But how much? Let’s break down the charges a bit.
The Danger of Credit Card Interest Charges
Let’s say that you have $500 charged to your credit card this month and your annual interest rate is 20 percent. That means that the amount of interest you’re going to be charged each day is about 0.0548 percent (divide 20 percent by 365 days in the year). So, you can calculate that you’ll be charged about 27 cents of interest each day. After 30 days, that will add up to about eight dollars and some change. If you did that all year long, you’d be paying around $97 per year just in interest (that doesn’t count any annual or monthly fees you may be subject to). Imagine what you’d rather be spending $100 on. That’s money for gas, groceries, or a chunk out of your bills for the month.
This isn’t to say that you can’t charge things to your credit card, because that isn’t true. You just need to know how important paying it off in a timely manner is. If you charge $500 to your credit card, try to set a goal of $50, $75, or even $100 per month payments in order to get that paid off quickly. Everyone that has a credit card has to deal with interest charges and fees, but you can ignore unnecessary, elongated periods of piling up interest.
What Happens if I Make a Late Payment?
Why Carrying a Balance is Bad
You’ll be charged interest for every day that you carry an unpaid balance, so your interest will continue to pile up after your due date. In addition, you’ll likely get smacked with a late fee. You’ll want to do some research on your issuer’s late payment policies, because late fees will vary. Commonly, you’ll be looking at a fee of $25 to $35 dollars on top of what you already owe.
Let’s take a look at that scenario that we created earlier. If your balance is $500 then you have eight dollars in interest in addition to your minimum amount due, usually around $25 or so. That means that before any regular fees or late fees, your total will probably be around $33 for the month. If your bank charges monthly fees, it will be more. If your payment is late, you’re going to have an extra late fee and interest. Let’s say your fee is $25. That bumps your payment up to $58.
Now, let’s say that your payment was 30 days late, that’s another eight dollars of interest on top of everything else — bringing your payment up to about $66. When the month began, your total amount due was $25 and now you’re paying $66 because it was late. That’s $41 that you could have saved.
How it Can Affect Your Credit Score
What’s more, when your payment is late, the bank will act quickly in order to get your payment fulfilled. Each bank is different about their policies, but if you let it go for too long, your total amount due will be sent to collections. If a collection agency is contacted in order to obtain the money from you, your credit score will be affected, which can make it hard for you to get approved for another loan in the future.
The longer that it goes, the worse it can be. Don’t worry, mistakes happen, but just do your best to get the total cleared up sooner rather than later. If you can fix the problem and stick to good financial habits going forward, you can clean up your credit score over time.
Owning a credit card is a strict responsibility and if you’re not careful, you could end up grossly overpaying for the simple luxury of having a credit card. However, if you start a plan now and work on sticking to a clear payment schedule, you’ll never be overwhelmed by your bill. What’s more, understanding your bill, what interest is, and what fees you might be charged is a necessity when it comes to budgeting for your credit card and financial planning.
Still have credit card questions? Visit our credit card learning center for more information!
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