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Understanding Debt Part 1

How to Read Your Credit Card Statement

By James R. Cook, CFP®
Senior Manager, Large Employers & Mergers and Acquisitions

Is the joy of Christmas turning into the blues of January as your credit card statements come rolling in? If so, you are likely in good company. It is just as easy to overindulge in your gift-giving as it is when the cookie plate gets passed. The result is that Christmas spending can take months—or years—to pay off if you are not careful, and what may have seemed like a bargain on Black Friday can turn out to be a very expensive gift.

Understanding Debt
This article is the first of a three-part series dealing with debt. In the following months we will cover:

  • Improving your credit score
  • Paying off your debt

In this article, the first of three on the topics related to debt and credit, we will focus on how to read and understand your credit card statement. If you are faced with credit card debt that you cannot pay off immediately, it is important that you understand how debt works so that you can make a plan to most effectively pay it off, particularly if you have a balance on more than one credit card. Since each of your credit cards has its own interest rates, charges, penalties, etc., knowing which card to focus on first—if you cannot pay them all off—can save you a significant amount of money.

1 Summary of Transactions
This section provides a summary of all of the payments, credits, purchases and charges that you have made since the last statement. Note that it starts with your previous balance (the same as New Balance on your last statement) and then lists each type of transaction separately. You may have additional types of transactions such as Balance Transfers, Cash Advances or Fees if they apply. Note that each type of transaction has either a ‘+’ or a -‘ , which tells you whether to add or subtract that amount from your pervious balance. If you did not pay off your previous balance, you will incur a finance/interest charge.

2 Credit Limit
Your statement will indicate how much credit your bank or creditor is willing to lend you. The better your credit, usually the greater this limit. For more information, read this article on Understanding Your Credit Score. The current amount that you have available is equal to your credit limit, minus your current balance. If you try to charge amounts over this limit, generally your charge will be denied at the point of purchase, or you may be charged an over-the-limit fee.

Maintaining high balances on your credit cards or routinely exceeding your credit limits will have a negative effect on your credit rating. The result will be higher interest rates, lower limits and possibly being denied future credit.

3 Payment Information
You will notice that much of the information in your credit card statement gets repeated. In this section, the statement takes your New Balance Total and addresses how much you actually have to pay to be allowed to continue using your credit card. This is called the Minimum Payment Due. You must pay at least this amount to meet the contract that you have with the credit card company. But be careful, do not think of this as the amount that you should pay, this is only the minimum. Your goal should always be to pay your balance in full each month. If you cannot pay it off in full, pay as much as you can. The third article in this series will discuss payoff strategies in detail.

4 Warning Notices
By law, these two notices must appear on your statement, and they are important. You have a contracted interest rate on your account, but this rate is only applicable as long as you meet your obligations. If you make a payment after the due date, most companies will charge you a late fee—$35 in this example. If you make a habit of either not paying your bill, or paying it late, the credit company has the right to increase your interest rate to a penalty interest rate that is usually very high. On this statement that fee is almost 30%! That means that everything you purchased with your card could end up costing you much more than the actual purchase price.

The second warning and the table that accompanies it illustrates what happens if you do not pay your balance off every month. Let’s look at the worst case. Using the example statement, if you make no more purchases with this card and only paid the minimum amount due each month, it would take you eight years to pay it off, and cost you $1,000 in interest charges.

5 Transaction History
This section is not illustrated in the example, but it is the detailed list of all of the transactions you made in the last statement period. This list is also included with your monthly statement. It is important to review it and look for two things:

  • First, make sure that all of the charges are in fact yours. Fraud on credit cards is all too common, so you want to make sure that there is nothing that looks out of place. If you see charges that you do not recognize, the good news is that you have significant legal protection, as long as you report any issues to the credit card company in a timely fashion. If there are disputed charges, you are not responsible for them while the credit card company investigates.
  • Second, look for charges that show a pattern in your personal spending. Using a credit card is much easier than pulling cash out of your wallet. A couple of bucks for a coffee here, a lunch out there, and your wallet doesn’t look any different. That $20 bill you had at the beginning of the week is still there, but you now owe more than that $20 to the credit card company. So take a look through the charges and take a couple of minutes to see where you are actually spending your money. Some credit card companies even have resources online that will automatically categorize the expenses in your current statement. You can see how much you spent on groceries, clothes, entertainment, etc. Does what you actually spent line up with your financial goals?

So, as those statements start rolling in for January, don’t just stuff them into your bills folder and then just make the minimum payment by the due date. Examine your statements:

  • Note how much of a balance you are carrying forward from one month to the next.
  • Note the interest charged.
  • Note your actual interest rate. Remember, if you think you got a great deal on something on sale for 15% off, but you are paying 17.88% interest on it, maybe it wasn’t such a good deal after all.
  • Examine your transaction history for spending patterns that you may want to change.

Finally, if you are paying off multiple cards each month, get a head start on making a debt management plan by completing the first part of this worksheet by listing your current debts. We will work with this worksheet in detail in the third part of this series.

If you want to get a jump on managing your debt and need more help, contact MMBB Financial Services at 800.986.6222 or

Next Month: Improving your Credit Score.