Even if you’ve mastered personal credit, using business credit cards comes with a whole new set of questions. While both personal and business credit cards have statement balances and current balances, the best strategy for paying them off may be different.
Small businesses can use credit cards to jumpstart projects, manage cash flow and create a healthy financial culture for their team. But because credit cards impact business credit, there are nuances that need to be understood to successfully use this financial tool.
One of the foundational concepts for using credit cards is statement balance versus current balance. In this article we'll cover the ins and outs of these two terms and how to use them to benefit your business.
Statement balance vs. current balance
When you look at your credit card dashboard, you’ll likely see two numbers. One is your statement balance (sometimes labeled “amount due”) and the other is your current balance (sometimes labeled “balance total”). They may be equal or one might be higher than the other.
What is a statement balance?
A statement balance reflects the amount spent within a given billing cycle. When the billing cycle ends, your bank issues a statement balance and typically gives you a grace period to pay. A grace period is the number of days you have to pay your balance before it starts accruing interest.
The CARD Act of 2009 mandates that consumer credit card issuers provide a minimum grace period of 21 days. While this law does not apply to business credit cards, most major banks and credit card companies give a similar grace period to businesses. Check your cardholder agreement if you are not sure what your grace period is.
What is a current balance?
A current balance is the statement balance plus the total amount spent after the closing date of the last billing cycle. In other words, the current balance is a real-time spending total.
You do not need to pay the current balance to avoid interest. The amount spent after the closing date of the last billing cycle will be included in the next billing cycle.
Which number is reported to credit bureaus?
Both your statement balance and your current balance are reported to business credit bureaus.
Personal credit cards report to the three major consumer credit bureaus: Equifax, Experian and TransUnion. But business credit cards report to business credit bureaus (also called commercial credit bureaus).
The three major business credit bureaus are Dun & Bradstreet, Equifax and Experian.
Why your statement balance is often different than your current balance
Your statement balance is often different from your current balance because the statement balance reflects spending during a specific billing cycle, whereas your current balance reflects the card's most up-to-date spending total.
For example, if your billing period is March 15 to April 15, the statement balance generated will only include spending up to bank closing hours on April 15. But because the bank usually gives you a grace period, you might not pay the amount due until April 30.
In this case, any money you spend between April 16 and April 30 will be added to the running total of what you owe on your credit card. This shows up on your account as your current balance.
Where this gets a little tricky is if you carry a balance on your card. Carrying a balance means that you have not paid the full amount due within the grace period. In this case, the remaining amount carries over to your credit card statement balance (and subsequently your current balance).
For example, if you spend $1000 between March 15 and April 15, then pay off $300 on the due date (May 8), you will carry a balance of $700 into the next billing period. The $700 will start to accrue interest after the due date.
Let’s say that the next billing cycle runs April 16 to May 16. Your statement balance on May 16 will include all of your spending during that time period, plus the $700 left over from the previous period. In addition to this, you will see the interest charges accrued as part of the amount due.
In this scenario, your current balance will be added onto the statement balance amount. So if you keep spending on the card after May 16, you will see the amount increase past the statement balance amount.
How do my credit card balances affect my business credit?
While both your statement balance and current balance are reported to credit bureaus, they affect your score differently. The biggest difference is that you do not need to pay a current balance in full to avoid major negative impacts; it’s a good idea to pay your statement balance in full whenever possible.
Your current balance impacts your credit utilization ratio, which is the percentage of credit you use compared to your total credit limit. For example, if you have one card with a credit limit of $10,000 and you spend $2,000 using this card, your credit utilization ratio would be 20%.
Credit utilization is an important factor when building your credit score. The rule of thumb is that you should try to keep your credit utilization under 30%.
Your statement balance, on the other hand, affects a lot more than your credit utilization. For one, failing to pay your statement balance in full will result in paying interest on the amount due.
Even worse, if you fail to pay the minimum on your statement balance, it will negatively affect your payment history. Payment history is considered a major factor in your credit score.
To make matters even more serious, many banks report missed payments not only to business credit bureaus but also to consumer credit bureaus. This means that failing to pay your statement balance minimum can affect not only your business credit score, but also your personal score.
Should I pay my current balance or statement balance?
The question of whether to pay your current balance or statement balance depends on your business priorities.
It is always a good idea to pay at least the minimum on your statement balance to avoid negative impacts to your credit. Paying your statement balance in full means you will not accrue interest and helps keep your credit utilization low.
But whether to pay your current balance depends on several factors, including your credit card limit and the cash flow of your business.
Your credit card limit matters because your current balance affects your credit utilization. Let’s say two different businesses spend $5,000 on their credit cards. One business has an available credit limit of $20,000, which makes its credit utilization ratio 25%; under the preferred 30% ratio. The second business has a credit limit of $10,000, which means its credit utilization is 50%.
In this case, the business with the lower credit limit might want to prioritize paying down the current balance until it gets to less than 30% so that its credit score is maintained. But the business with a higher credit limit may want to prioritize having cash on hand and may choose to wait to pay the amount on the statement due date.
Neither option is wrong. Even a business with a lower credit limit may choose to prioritize having cash on hand if its credit score will not be important in the near future. Likewise, the business with a higher credit limit may choose to pay down the current balance in hopes of boosting its credit score before applying for a loan.
Like any business decision, there are trade-offs in how balances are managed. The most important step is to never miss a minimum payment. By always paying the minimum payment due on a statement balance, you avoid delinquencies that can negatively impact both your business and personal credit score.
How can I protect my business credit score?
Having a good business credit score comes with a number of benefits. The most widely known is that a good credit score increases your chances of being approved for loans, credit cards, and higher credit limits.
An often overlooked fact is that potential clients can easily access your business credit score because it is public information. Bigger clients and projects may take this into consideration when deciding to do business with you.
Because it can have such a big influence when securing funding (and even revenue) for your business, it’s important to protect your business credit score with these steps.
Set up automatic payments
Setting up an automatic payment helps you avoid interest, late payments, and being flagged as a delinquent account by lenders. With most cards, you can automatically pay your statement balance in full on the due date.
If you don’t want to automate the full amount, you can choose an amount you feel comfortable with. At the very least, it’s worth it to automate paying the minimum on your statement balance every month to avoid sending your account into delinquency.
Incorporate credit payments into monthly budgeting
Tracking credit card payments is an important part of financial planning and analysis. Keeping tabs not only on your own spending, but that of your whole team allows you to efficiently allocate resources and properly plan your operating budget.
Strike a balance on your credit utilization rate
As discussed above, your credit utilization ratio has an impact on your business credit score and it's wise to keep it under 30%. But some business models and strategies benefit from a higher utilization rate.
For example, if you have a seasonal business that requires a large upfront investment, it might make sense to use a credit card to fund overhead costs and then pay off the credit card debt with revenue from the investment.
On the other hand, if you’re using your business credit card primarily as a way to build business credit so that you can apply for a loan, prioritizing a low credit utilization may be best.
There is no one-size-fits-all answer to how to use a business credit card. But knowing your priorities and creating a plan around how your business uses credit cards will help you get the most out of this financial tool.
Ramp helps your business build credit
Credit cards can help you build business credit, but only if they are used in an organized way. Ramp corporate cards give you the insight and control you need to make sure your credit card is working for you.
You’ll have full visibility into how your team is using credit cards, down to details like spending by category. You’ll also be able to manage and track business spending by setting spending limits. This goes even further with unlimited virtual credit cards that can be uniquely generated to pay individual contractors or subscriptions - with their own set of spending rules.
Ramp is more than a business credit card. It’s a business budgeting software that helps you plan your spending so that you can build your credit and your business.
Get started with Ramp with no personal credit checks or founder guarantee.