The Complete Guide to Credit Card Payments

How Do Credit Card Payments Work? & How to Calculate Them

Jason Steele

Updated January 13, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

The most important part of using a credit card is not earning rewards or using benefits — it’s correctly making your payments. When you’re able to make payments on time and can control your debt, you’ll enjoy a high credit score and access to the top credit cards available. But if you fail to understand how credit card payments work, it can hurt your credit and make it difficult to qualify for all kinds of loans.

How Credit Card Payments Work

A credit card isn’t just a small piece of plastic or metal; it’s a powerful financial instrument. Every time you make a charge to your credit card, you are taking out a loan against the line of credit that your card represents. And just like any other loan, you will have to make timely payments or your account will be considered delinquent. Each credit card account is billed in 12 monthly statements each year. And while the beginning and end of your billing cycles probably won’t correspond with the start and end of each month, your account’s due date will be on the same day of the month, every month. For example, your payment might be due on the 10th of each month. At the end of your billing cycle, your credit card issuer will total up all of the charges you’ve made to your account, along with any interest and fees incurred. It will also subtract any payments you’ve made during the last billing period, and present you with a statement, either online or through the mail. Your payment due date will be at least 21 days after the billing period ends, and many cards give you as long as 25 days. At that time, you’ll have the option of making a payment that is at least the minimum amount due. Alternatively, you can choose to avoid credit card interest charges by paying your entire statement balance in full.Paying in full each month can end up saving you a lot in interest. With the average credit card interest rate hovering between 14% and 15% APR, that can quickly add up on top of the unpaid principal you’re carrying over.

Calculating a Credit Card Payment

There are several factors that contribute to the payment amount that you’ll see on your monthly credit card statement balance:

First, the card issuer will start with your previous balance and subtract any payments you made during the previous billing statement.
Then, it will add up all of the charges that you made during the billing payment, and include all of the fees incurred. These fees can include the card’s annual fee, late fees, balance transfer fees and cash advance fees.
If you didn’t pay your previous statement’s balance in full, then you’ll also incur interest charges.

By tabulating all of these charges and payments, the card issuer will arrive at your statement balance. In addition to the balance, your credit card statement will also include a minimum payment amount. A card’s minimum payment will be calculated in one of two ways:

Based on a flat percentage: Some card issuers calculate the minimum payment by using a flat percentage — typically between 1% and 3% — of your total statement balance. So if you have a total statement balance of $2,000, and your card issuer requires a minimum payment of 2%, then your minimum payment will be $40 for that statement period. And with many cards, the minimum payment will be the entire balance if it’s below a specified amount, such as $35.
Based on a percentage of your statement balance, plus fees and interest: Other card issuers calculate your minimum payment based on a percentage of your statement balance, plus fees and interest. Suppose your new charges and payments add up to $1,000, and you have interest and fees that add up to another $100. If the card issuer is using this method and charging 1% of your statement balance, not including fees and interest, then your minimum payment will be $110. That’s 1% of the $1,000 balance, not including interest and fees, plus $100 in interest and fees.

As with the other method, most card issuers will require you to pay the entire balance if it’s below a certain amount, such as $35.

How to Make a Credit Card Payment

There are several ways to make a credit card payment, including:

Electronically
By mail
In cash at a branch

The method you choose will determine how long it takes for a credit card payment to process. Traditionally, many credit card users would receive their statements in the mail, along with a return envelope. The credit card user would then write a check and mail it back to the card issuer.However, it’s now more convenient, and increasingly more common, for credit card users to send payments electronically from their checking or savings accounts, whether through the bank’s website or its mobile app. Alternatively, you can initiate your payment from your credit card issuer. In fact, nearly all credit card issuers now allow you to configure payments to be made automatically, and you can choose whether to pay the minimum or your full balance. Automatic payment is the most reliable way to make payments, and so long as you have sufficient funds in your account, you’ll never make a late payment. If your credit card issuer offers retail banking locations, another option to make a credit card payment is to visit a branch and pay by cash.

How Long Does It Take for a Credit Card Payment to Process?

According to the CARD Act of 2009, credit card issuers must credit any payments received by 5 p.m. on the day they get them. However, it may take several days for the credit card payment to be processed and the new balance reflected on your account. But no matter how long this process takes, ultimately, your payment will be credited on the day it was received, so long as it was completed before 5 p.m. Between the time the payment was received and when it’s fully processed, it will be considered “pending.”

When Is a Credit Card Payment Considered Late?

A credit card payment is considered late if it is received after 5 p.m. on the day that it’s due. A payment is also considered late if the amount paid is not equal to or greater than the statement’s minimum payment amount.

What Happens If I Miss a Credit Card Payment?

As a credit card holder, it’s crucial to ensure you make your payment on time and that your payment is at least as much as your statement’s minimum payment amount. Otherwise, missing a payment could cost you in three different ways.

Credit Card Fees

When you miss a payment, most credit cards will impose a late payment fee on your account. For some credit cards, the late payment fee will be up to $40. However, the fee can’t exceed the amount owed.

Interest Rate

When you fail to make the minimum payment on time, most credit cards will impose a penalty interest rate on your account. This is a rate that is much higher than the standard interest rate, and it can apply to your account indefinitely once imposed.

Reporting to a Credit Bureau

When you make a late payment, that information can be reported to the three major consumer credit bureaus. Since your payment history is the largest factor in your credit score, you can expect to see some harm to your credit. Thankfully, some credit card issuers won’t report to bureaus that an account is delinquent until your payment is at least 60 days late.

Tips to Pay off a Credit Card on Time

The best way to ensure that you make your credit card payments on time is to configure your account to make payments automatically. So long as you ensure that you have sufficient funds in your checking or savings account, then this is a guaranteed method of ensuring on-time payments. It’s also important to remember to always make payments to your credit cards, even if you are using 0% intro APR credit cards or a balance transfer credit card.Other tips include configuring your account to remind you of when your statement is available and when your payment is due. And if you have multiple credit card accounts, you may wish to request that all of the due dates be on the same day of the month, so you have less to worry about.

Find Personalized Credit Card Offers With Lantern

Once you understand how credit card payments work and how to make sure you make your payments on time, the easier it will be to manage your credit card accounts. Without having to worry about how payments work, you’ll also be in a better position to choose the right card for your needs. Lantern by SoFi makes it easy to consider your credit card options, whatever your financial goals may be. If you’re interested in boosting your credit, for instance, comparing credit building credit cards can make it simpler to find a card that’s right for you.

Photo credit: iStock/TempuraThe tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC112190

About the Author

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.

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