Credit cards are a great financial tool. They not only provide financial flexibility, but they also give you the ability to build and improve your credit score. Additionally, each time you use your card for eligible spends, you get rewarded with cashback, points, or air miles. You can use the cashback to offset your monthly statement, the points can be redeemed for products or retail, entertainment, travel, and lifestyle vouchers, and the air miles can be redeemed for discounted or free air tickets.
So, you see credit cards are indeed an underrated financial tool.
That being said, all of these benefits come with the caveat that you pay your monthly bills in full and on time.
So, let’s take a closer look at this all-important monthly statement and how effectively it can be read.
The Important Terms
When you look at your credit card bill or statement, you will see many columns and numbers that can be quite confusing. Here are the important terms you need to know:
An Account Summary
Found mostly towards the beginning of your statement, the account summary, as the name suggests provides a quick summary of your credit card usage.
It shows you your opening balance or the amount you started a particular billing cycle with, the amount you have spent in the current cycle, and any other charges that you may count towards the current billing cycle.
Payment Due Date
This is the first part of the statement you need to check. The payment due date represents the day by which you need to repay the bank. Failure to pay on time will lead to late fees being applied on the amount as well as interest being charged.
If you pay your bill on or before the payment due date, you will neither incur interest payments, nor will you incur a late payment fee.
Total Amount Due
This amount is the total amount that needs to be paid by the payment due date. In general, this amount represents the monetary value of the retail transactions you have made with the card for the statement period. However, if you have incurred any late payment charges or interest charges, that amount will be included as well. Additionally, if you have converted any purchase into monthly instalments, the total amount will also take into consideration the instalment payable for that month.
Minimum Amount Due
All credit card issuers provide you with the option of paying a minimum amount each month instead of the entire amount due. This amount is generally quite low when compared to the total amount since it is around 3% to 5% of the total amount you owe the bank.
It is generally advised to pay the minimum amount only as a last resort, i.e., you absolutely cannot pay the total amount due and you don’t want to default on your payments.
The reasoning behind this is simple. You see, when you pay the minimum amount, the entire portion doesn’t go towards the principal amount due. A large portion goes towards servicing the interest and a smaller portion goes towards the principal. As a result, the interest you will be charged on the principal amount will be greater than what you anticipate, the following month. These interest charges will keep compounding until you clear the full balance.
You can find this part of your statement right on top of the bill. The statement period mentions the time period for which the bill is generated.
In general, a statement period is a month. It isn’t always a calendar month.
On your statement, you will notice that there are three types of credit card limits mentioned. These are:
- The total credit limit on your card
- The credit limit currently available
- The cash limit available
Let’s look at each of them in detail.
Total Credit Limit
This is the total amount of credit available to you. Each time you use your card, the amount of credit you are eligible for is reduced from this total amount. Every payment increases the credit limit back to this amount.
So, if the credit card issuer tells you that your card comes with a credit limit of Rs.1 lakh, it means that you can use the card for expenditure up to Rs.1 lakh. Anything over this and you may incur an over-limit fee.
Current Credit Limit
Now, let’s say that for the current statement period, the amount you owe is Rs.25,000. This amount is reduced from the total credit available to you. So, your current credit limit is Rs.75,000. Once you pay Rs.25,000, your credit limit will be restored to Rs.1 lakh.
This is the amount you are eligible to withdraw as a cash advance. This is like a short-term loan taken on the credit card. The loan amount will not affect your credit limit since it is treated as a separate loan. These loans are quite expensive and most financial gurus will advise against taking these loans unless you are left with no other option.
You already know that each time you swipe your card, you earn points. You can accumulate these reward points and redeem them for vouchers or products from the bank’s rewards catalogue.
To know just how many points you currently have, you can check the ‘Rewards Points Balance’ section of your credit card statement.
Generally, this section will also provide information about the validity of your points, if any points have lapsed, and if any points have been carried forward from the previous statement cycle.
All the transactions you have made for the statement period or billing cycle will also be provided. These transactions are provided in chronological order and have information such as the date of the charge, where it was used or what product is was used for, and the exact amount that was charged to the card.
A good rule of thumb is to always take a careful look at the transaction details and immediately dispute any transactions if you find a discrepancy. You don’t want to simply have to spend money for a transaction that you didn’t make in the first place.
If you keep track of these 8 parts of your credit card statement, you will be able to prevent yourself from falling into a debt spiral. Remember that credit cards are a great way to save while you spend, but you need to use it wisely.