Credit is a valuable tool that gives businesses access to funds they wouldn’t otherwise have. This injection of capital opens up the possibility of making otherwise unattainable purchases and growing at a faster rate.
But taking on credit comes with a very important catch: that balance needs to be paid down regularly to avoid interest and fees.
When you check your credit account, there are two balances: the statement balance and the current balance.
What are the differences between the two? How do they affect your credit score? And most importantly, which balance needs to be paid down to avoid those pesky penalties?
Let’s break down the differences so you can manage your debt and payments with confidence.
What is a statement balance?
The statement balance is the amount left owing on a credit account at the end of a billing cycle. The name refers to the balance as shown on the digital or physical statement you’d receive when the billing cycle is complete.
Billing cycles end on a set date each month (e.g. the 20th of every month). While they are monthly events, they don’t occur on a calendar month basis.
The amount left owing is a summation of all the account activity up until that point. This includes charges that increase the balance owed, payments that reduce the balance, and any interest charged to the account.
The statement balance may be more or less than you expect because of when the cutoff period ends. Processing times for transactions may be one to two business days meaning it would not be processed on the same day.
If your billing cycle ends on the 15th of the month and a transaction occurs on the 15th, it may not appear on the statement because it isn’t processed until after the date has passed.
Interest is charged based on the unpaid portion of the statement balance. For example, if your statement balance is $1,500 and you made a payment of $1,000, interest would be charged on the remaining $500 ($1,500 - $1,000).
What does current balance mean?
The current balance is the amount left owing on a credit account at the present point in time. It’s the summation of all activity on the account up until the present.
Think of the statement balance as a snapshot in time, like taking a photo of the balance on a specific day. The current balance is similar to a live feed showing the present state of the account.
The current balance may be higher or lower than the statement balance depending on what’s happened since the billing cycle ended. Payments would result in a lower current balance while additional charges or interest would raise the current balance above the statement balance if no payments were made.
As an example, say your business statement balance is $1,500 and you made a $1,000 payment. But then 10% interest accrues on the outstanding $500 increasing the balance by $50. The current balance would be $550, less than the $1,500 statement balance.
Current balance vs Statement balance
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How to find your statement balance and current balance
Statement balances are found on the business account’s statement. This includes credit card statements, loan statements, and line of credit statements.
Depending on how your account is set up, you may receive statements physically or digitally which will be sent by email or can be found in your online account.
Current balances are found in online accounts or, if kept up-to-date, your accounting platform. Being up-to-date means that all transactions up to the present have been reconciled and recorded in your accounting platform.
How your balances affect your credit score
Both the statement balance and the current balance may affect a business’s credit score.
Your statement balance is most likely to impact your credit score if a payment is not made toward it during the grace period.
All credit activity, including missed payments, is reported to the three credit bureaus (Equifax, Experian, and TransUnion). Any missed payments negatively impact the business’s credit score.
The current balance impacts your credit score if you exceed your credit limit or if you use too much of the credit available (referred to as the credit utilization ratio).
To build your business credit score, consider some of the following tactics:
- Make regular payments on your debt
- Set up auto payments to never miss a due date
- Pay down your debt before charging a large purchase to a credit card
- Pay down the statement balance in full as opposed to making a minimum payment
- Run transactions through your business bank account to keep your credit balance in check
Should you pay your statement balance or current balance?
Paying either the statement balance or the current balance will avoid any interest or penalties on the business account. Which balance you pay down is a matter of personal preference.
You may consider paying down the statement balance to:
- Minimize the impact on your cash flow
- Keep more capital in the business
- Cleanly connect payments to statements in your record keeping
Alternatively, you could opt for paying down statement balances to:
- Reduce your credit utilization ratio by a greater amount
- Get ahead of future payments, freeing up cash flow in the future
- Potentially improve your credit score
How your current balance affects the credit utilization ratio
The credit utilization ratio is how much of the available credit is currently outstanding debt.
If your credit limit is $10,000 and you currently have $4,000 of outstanding debt, the credit utilization ratio is 40% ($4,000/$10,000).
Generally speaking, a lower credit utilization ratio is better, at least in the eyes of the credit bureaus that calculate a business’s credit score. No matter what your credit limit is, using a large percentage of it will negatively impact your credit score.
Current balances are used to calculate credit utilization ratios, not statement balances. If you’re worried about your credit utilization ratio, always check the current balance and consider making early payments to keep your ratio in check.
What happens if a statement balance isn't paid?
Credit companies charge interest and penalties for missed payments on the statement balance. These fees and penalties are unique to each credit option and carrier; what it would cost you depends on the terms and conditions of the business account.
Each missed payment could potentially impact your credit score. The longer an account goes without a payment, the more likely it is that your credit score will take a hit.
In severe cases, credit companies may resort to using collections agencies for payments.
Using automatic payments to avoid interest charges
Missed payments can happen for completely innocent reasons. But steps can be taken to ensure you’re never missing payments and avoid interest charges and penalties.
Setting up automatic payments allows credit companies to pull funds from a bank account to pay down the balance without manual inputs.
Depending on the options available to you, you should be able to set up automatic payments for the full statement balance, the minimum payment, or a custom amount. Remember that paying anything less than the statement balance may result in interest accruing.
By using automatic payments, you cut down your workload, avoid late charges, and maintain a solid credit score.
To set up automatic payments:
- Confirm your credit provider offers automatic payments
- Connect a bank account that is likely to carry a sufficient cash balance (rejected automatic payments due to an insufficient balance could affect your credit score)
- Schedule payments days before the due date to allow time for processing
- Confirm payments are being made successfully by reviewing your balance and bank statement
- If possible, consider setting a secondary payment option to cover any instances of a payment bouncing due to an insufficient balance.
Get credit and manage it better with BILL
Get access to credit that works for you with BILL. With no hidden fees, no contracts, and seamless integration with our budgeting platform, you get the credit you need to run your business at any stage of the journey without having to worry about costs.
Budgeting and forecasting features help you plan and manage payments to avoid cash flow shortages that disrupt your business. Set up automatic payments to guarantee you never miss a due date.
Learn more about how BILL can help you obtain and manage your credit.
FAQ
Why is my current balance different than my statement?
The current balance differs from the statement balance when there’s activity on the account that has happened after the billing cycle ends and the statement is issued.
A common example is payments that are processed after the statement is issued resulting in a lower current balance than the statement balance.
Other activity that will result in a difference between the balances include additional charges to the credit account, interest accruing, or additional fees (such as an account fee) being charged to the account.
Why did I get charged interest if I paid the statement balance?
If you are charged interest despite paying the statement balance in full, the most likely culprit is residual interest (also called trailing interest).
Residual interest is the interest that accrues in the time between the statement being issued and a payment being made. This means credit companies are charging you interest on a daily basis, not monthly.
For example, if your credit account has an APR (annual percentage rate) of 18%, you can find the daily interest rate by dividing that rate by 365 (0.049%). For a statement balance of $1,000, $0.49 would accrue every day.
If it takes 10 days for the payment to be made and processed, $4.90 of interest will show up on your next statement.
To avoid residual interest, consider setting up automatic payments that minimize the time between a statement being issued and a payment being made. It’s also worth reaching out to your credit provider for their recommendations on minimizing residual interest charges.
Why do I still have a statement balance if I already paid it?
There are multiple reasons why you could still have a statement balance despite already paying it:
- A new billing cycle has ending resulting in a new statement balance
- The payment still in processing and hasn’t been received by the creditor
- Residual interest has accrued between the end of the billing cycle and the time of the payment
What happens if I pay my statement balance early?
Paying down a statement balance early reduces the amount that shows up on your statement, but most importantly, it reduces the amount that’s reported to credit bureaus.
This means that credit bureaus are seeing you as owing less money and having a proven history of maintaining your debt. Both of these factors can possibly improve your credit score.
What happens if I overpay my statement balance?
Overpaying a statement balance applies a credit to your account, typically noted by showing a negative owed balance. This credit rolls over and applies to any future activity.
For example, if you overpay a credit card statement by $200, you’ll have a $200 credit. If you then make a $350 purchase, the amount owing is reduced to $150 ($350 - $200).
