Credit cards can be a valuable tool, but it is important to understand some basic concepts to maximize their benefits. You should become familiar with many terms as a cardholder, and one of the most important things to grasp is your billing cycle.
As the name suggests, a billing cycle relates to the amount you owe to your credit card issuer for using your credit card. Understanding the details can help you avoid paying too much in interest and late fees.
Before you decide to get a credit card, it is crucial to clearly understand what takes place during a credit card billing cycle and how it impacts the amount you are required to pay each month. Today, we will explain what a credit card billing cycle means and its influence on your credit score.
What Is a Credit Card Billing Cycle and How Does It Function?
The credit card billing cycle, sometimes called the statement cycle, is the timeframe during which your bill is compiled. All the transactions you make within this period will be shown on your credit card statement for that month.
For example, let’s say your card’s billing or statement date is the 3rd of every month. This means your billing cycle typically spans from the 4th of the previous month to the 3rd of the current month. Any purchases, cash withdrawals, payments, and other transactions you conduct within this period will be included in the statement generated at the end of the billing cycle.
Suppose a credit card statement is generated on February 10th. This statement covers transactions made from January 9th to February 10th. Any transactions conducted after the statement date (February 10th, in this case) will be recorded in the following month’s billing statement.
What is the Credit Card Billing Date or Statement Date?
The billing date, also known as the statement date, is the day your statement is generated each month. Usually, it is the final day of your billing cycle for that particular month. Any transactions you make on your card after the billing date will appear in your subsequent billing statement. Using the previous example, if February 10th is the billing date for the billing cycle that stretches from January 9th to February 10th, any transactions occurring after February 10th will be shown in the billing statement produced in April.
How Is The Minimum Amount Calculated?
When you receive your billing statement, you’ll find the payment due date specified. You need to settle your outstanding balance on or before this date to prevent incurring any penalties. The payment due date usually falls within 21 to 25 days after the statement date or after the conclusion of the billing cycle. The timeframe between the billing date and the payment due date is the interest-free credit period or grace period provided by the card issuer upon your credit card application approval. Consequently, the due date is determined by the interest-free credit period extended by the credit card company.
What is the Minimum Amount Due (MAD), and How is it Calculated?
If you cannot pay off your entire credit card balance for a particular month, you can make a smaller payment to prevent incurring a late payment fee. This smaller payment called the Minimum Amount Due (MAD), is determined by your credit card issuer. You’ll find the MAD specified in your credit card statement for the month.
Usually, the minimum amount due is around 5% of your total outstanding credit card balance, or it can be a fixed amount, such as Rs.200 to Rs.300, depending on your card’s terms. If you have any loans associated with your credit card, the monthly installment will be added to the minimum amount due. In this scenario, the MAD becomes 5% of the outstanding balance plus EMI(s) and any applicable taxes. Any amount over your credit limit and any unpaid MAD from previous months will also contribute to the current month’s MAD.
How Does the Credit Card Billing Cycle Influence Your Credit Score?
While the credit card billing cycle might not directly affect your credit score, certain actions within the cycle can have a substantial impact. Missed payments, making only partial payments, or paying the minimum amount due can significantly harm your credit score. According to CIBIL (Credit Information Bureau India Limited), a missed payment can negatively influence your credit score for up to two years. This information is visible on your credit report for up to 36 months. As credit card issuers usually share your credit card account data with credit rating agencies every 30-45 days, even a single missed payment – intentional or accidental – can negatively affect your credit score.
When you get your card after credit card application approval, you must check your monthly statement to know your payment due date and the minimum payment required. Efficiently managing your credit card billing cycle and making timely payments are essential. Doing so will contribute to maintaining your creditworthiness, which is your ability to be considered a reliable borrower.