How do credit card payments work?

Credit card payments are integral to many businesses whether they are accepting them as a form of payment from customers or using them to pay their own bills.

A 2023 poll by Forbes Advisor's revealed that 29% of businesses used credit cards for funding. However, of those relying on business credit cards nearly half cited difficulty managing debt repayments as their primary challenge.

Before using credit cards for funding, consider if it is right for you. This blog covers credit card payments, their pros and cons, and strategies to avoid fees and other costs.

What is a credit card balance?

When using a credit card, the charged amount is added to the total owed. This is known as the credit card balance. This balance includes more than just purchases.

There are two balances for credit card bills which are statement balance and current balance.

Current balance

This reflects the balance in real-time, including all purchase charges, fees, interest, and unpaid balances.

Statement balance

This is the total amount owed at the end of the most recent billing cycle. It includes purchases, fees, unpaid balances, interest and any payments or credits since the last statement.

This information can be found on the credit card bill or app.

Before paying:

1. Check the minimum monthly payment required to keep the account in a healthy state.
2. Review the due date, which is when the issuer must receive payment.
3. Look at the new balance or credit card statement balance to know how much to pay to avoid interest on future purchases.
4. Finally, review the current balance, which is the amount needed to bring the account balance to $0.

How do credit card payments work?

A credit card allows the user to spend up to a predetermined limit, generating a monthly bill for the expenses.

It is recommended to pay off the full balance each month, but the user must at least pay the minimum amount. The minimum can be 1% of the outstanding balance. This minimum can vary depending on the card issuer, and also includes the interest, default charges, and any annual fee.

Online payments

Log in to the credit card account or issuer's app to make manual payments from a linked account. This allows users to pay anytime and choose the amount.

Autopay

Set up automatic payments from a linked account. The user can specify an amount or select the statement balance or minimum payment. The payment date can then be confirmed.

Phone

Call the bank to make a payment after confirming the account and payment method, often through an automated service.

Mail or wire

Send a personal check, wire payment or cashier's check. Note that mailing payments carries the risk of loss, theft, or delayed arrival.

In-person payments

Payments at a bank or ATM for quick, secure transactions.

Advantages and disadvantages of borrowing on credit

Pros

Managing larger purchases: Spreading out payments over time can help with cashflow.

Improving credit score: Businesses can improve credit scores by consistently paying on time and being trusted for credit. This helps with any future large purchases.

Covering unexpected expenses: In emergency cases for businesses, a credit card can provide immediate financial relief. The balance can then be paid off gradually.

Global acceptance: Credit cards offer convenience and widespread acceptance compared to charge and prepaid cards.

Enhanced security: Credit cards provide enhance security compared to cash. In case the credit card is lost or stolen, reporting it promptly can minimize losses. Fraud protection offers a higher chance of recovery.

Perks: Many credit cards offer perks like air miles, reward points, and cashback, but choosing a business card solely for these benefits isn't advisable.

Cons

High-interest payments

High-interest payments can accrue if the borrower carries a balance past the monthly deadline and isn't under a 0% interest promotion. Compared to other types of borrowing, these interest charges can become significantly higher over time.

Watch out for debt accumulation

Missing a single payment triggers interest charges that accumulate quickly. If the balance is not paid off monthly, the debt can grow substantially over time.

Can damage credit score

Borrowing on credit offers a chance to enhance credit score by making timely payments. However, missing payments or exceeding the credit limit can harm the credit score, impacting the borrower’s ability to secure future loans.

Credit Card Fees

Late payment fees

Late fees can be costly if you miss your minimum payment due date. Additionally, late payments are reported to credit bureaus, impacting credit history and potentially lowering credit score. It's important to manage payments promptly to avoid these consequences.

Annual fees

Annual fees are charges paid each year for holding a credit card. While many cards don't have annual fees, those that do often come with rewards programs offering greater benefits on purchases. It's worth considering whether the rewards outweigh the cost of the annual fee before choosing a card.

Over-the-limit fees

Over-limit fees may apply if the credit card limit exceeds. Some issuers may charge a fee for this, while others might decline transactions that surpass the limit to prevent further charges. It's important to stay within the credit limit to avoid these fees and potential inconveniences.

Failed transaction fees

Returned payment fees are charged when a credit card payment fails due to insufficient funds or other reasons. This fee is imposed by the credit card issuer as a penalty for the unsuccessful transaction. It's important to ensure that there is enough funds to cover the credit card payments.

Cash withdrawal fees

Cash advances are charges incurred when withdrawing cash using a credit card. Typically, this fee is a percentage of the amount withdrawn and tends to be quite expensive compared to other forms of borrowing. It's important to be aware of these fees and consider them carefully before opting for a cash advance on your credit card.

How to prevent late payment fees from credit cards

• Knowing the payment due date is crucial to ensure timely credit card bill payments and avoid late fees. Below are some helpful practices to prevent late fees.
• Set up autopay for at least the minimum payment to avoid late fees, but ensure enough funds are available. Choose a due date that suits your financial schedule.
• Monitor your spending carefully and treat your credit card like a debit card.
• Make multiple payments throughout the month to lower your balance and avoid high bills. If you miss a due date, pay as soon as possible to prevent damage to your credit score.
• Sign up for alerts via email, text, or app notifications to track your balance and due dates.

Conclusion

Understanding the credit card balance, payment options, and fees is essential for managing finances effectively. Paying the full credit card statement balance before the due date means businesses don't pay interest, while carrying a balance incurs interest on new purchases.

Utilizing autopay, choosing your payment dates wisely, and monitoring your spending are key strategies to avoid late fees and maintain a healthy credit score.

By staying informed and proactive, you can navigate credit card payments more confidently and mitigate financial risks associated with borrowing on credit.