The interest saving balance is the sum of the minimum monthly payment required by your credit card company, plus all the new purchases you made in the latest month. The term is misleading, as it just indicates that you avoid additional interest charges on new purchases. You still will incur interest on your prior balances.
The term is gradually appearing with more card issuers like Amazon and Chase. By downplaying the interest cost, the credit card companies want you to carry a loan balance for as long as possible, which means you end up paying hefty interest charges!
If you can, I recommend paying off your entire credit card bill each month. If that’s not possible, aiming to pay down as much of your outstanding balance as possible is a good idea. Below, I’ll explore what the meaning of interest saving balance is and how to best deal with credit card debt.
Understanding Credit Card Terminology
If you’re like me, you may well have held a credit card or two over the years. Providing you keep up to the payments, they can be fantastic tools for spreading the costs of big purchases and earning fantastic rewards! However, that doesn’t mean your credit card statements are always easy to understand.
Before we dive in to the details on what exactly an interest saving balance is, let’s touch up on some key terms used in the credit card and lending industry. This will help us cover the discussion around the interest saving balance in a comprehensive manner.
What is a credit card APR?
The APR on a credit card is the annual percentage rate that you are charged for carrying any balances on the credit card. The APR includes the interest rate that lenders charge and also any other fees – such as a monthly installment fee or credit insurance fee – that may be bundled in. The APR therefore helps you understand the effective cost of using a credit card. The APR is expressed at a percentage of overall cost of the amount you repay to the issuer or bank every month.
On credit cards, the APR usually exceeds 20% per year, which works out to roughly 1.6% per month or more. While the monthly figure doesn’t seem like a lot, it does add up over time – especially if you carry the balance from month-to-month. For example, with a balance of $2,500, you’d pay $42 per month in just interest and other charges. While this may not seem like a lot, this works out to $500 over a year!
Typically the APR is only charged on balances that are carried more than 1-month from when they were charged. So if you bought something in January, but paid off the bill fully in February, then you do not incur any charges. However if you do not fully pay the bill in February and carry the balance on further, your credit card company will start to charge you for carrying that balance.
What is the minimum payment on a credit card?
The minimum payment on your credit card is calculated based on many different factors, with the main ones being your card balance and your APR. If you are carrying a very small balance, then the minimum payment could be a fixed amount like $25. However if you are carrying a larger balance, it could be something like 2% of your balance plus the monthly APR costs incurred.
If you can make the minimum monthly payment on your card, then the good news is that your credit score will not be too negatively impacted. However if you consistently carry credit card balances, your credit score will still be poor because it makes you a risky borrower for lenders. If you were ever referred to collections, it would dramatically impact your score.
The bad news if you only make the minimum payment is that it can take a very long time to pay off the existing balance. On my recent statement, I saw that if I only made the minimum $113 payment on my balance of $3,000, it would take me 12 years and 10 months to pay off just this bill! And that doesn’t include any further purchases that I would make on this card. If I incur new charges but don’t pay them off full either, it will start to get ugly very quickly!
Paying just the minimum amount on your credit card statement is almost a guaranteed way in to a death spiral on debt. I strongly recommend that you clear off your entire credit card bill as quickly as possible. If you can’t pay the full bill, you should aim to clear at least 10-20% of your total balance each month.
If you want some help calculating what your loan payments should be, try out our loan payment calculator.
What is an Interest Saving Balance?
Now that we know what the APR and minimum payment on a credit card statement are, let’s finally try and understand how interest saving balance works. For this, let’s pick on Chase and the example they have on their website. Note that the credit card provider doesn’t matter, so whether it’s Chase or Amazon, the interest saving balance works in the same way on both cards.
In this case, the credit card bill has a minimum monthly loan balance payment of $439. This person also used their credit card to make new purchases of $500 in this month. Chase is telling you that the interest saving balance is $439 + $500 = $939 in this month.
Chase claims that by paying this $939 you are saving on interest. But are you really? As we discussed above, the minimum payment already includes interest determined based on your loan balance and APR.
On the new purchases of $500, you would not have to pay the interest anyways for at least one billing cycle, which is normally one month. So what exactly are you saving here? Nothing! Now do you understand why I call this a marketing ploy?
If you did not pay the $500 off (in addition to the minimum payment), you would incur interest on it anyways. So really, Chase is just pulling a rabbit out of the hat and calling it a bunny. It’s just new marketing spin on how a credit card statement works anyways.
The only point I will concede here is that if you do pay off the full $939 shown here, you will not incur any additional interest charges in the coming months from the $500 worth of new purchases that you made in the most recent month. You will still incur interest on the loan balance that you have been carrying forward though. Perhaps the credit card companies are just trying to tell you that in a somewhat confusing way.
Interest Saving Balance vs Current Balance
The current balance on your credit card statement reflects the total outstanding amount on your credit card. On some bills this could also be called the “New Balance” or “Statement Balance”. The current balance is a total of your prior unpaid balances, the new purchases you made in the month, and the charges (interest and fees) that you incurred in the month.
If you pay off the entire current balance, you have fully paid off your credit card. This means your balance goes to $0! Congratulations! Your next bill will then only reflect any purchases you make in the month. However you will not have to pay any interest, which is a big relief!
As I outlined earlier, the interest saving balance is just a sum of the minimum payment that you have to make on your prior balances plus your new purchases. If we continue with the above example, the interest saving balance is $939. You can see on the bill however that the New Balance (another name for Current Balance) is $5,500.
If you just pay just the $939, you will still have an outstanding balance and you will incur charges on the rest of the balance. If you however pay off the full $5,500, your balance goes to $0!
Should I pay my interest saving balance?
Yes, you should at least pay off the interest saving balance. However to avoid interest charges that are still hidden in there, I recommend paying off more.
Here is my suggested order of preference in terms of paying off your credit card balances:
- Entire Amount: If you can, always pay off the entire amount (the current balance or the statement balance) from your card. This ensures you will pay $0 in interest. If you can’t do that, try the next step.
- 50% of your balance: If you can’t pay off the entire amount, at least try to pay off half your card balance. This limits how much interest accumulates on your card. If you can’t do that, try the next step.
- Pick whichever of the following two are larger:
- At least 25% of your total balance: On a calculator, take your total outstanding balance and multiply by 0.25. Note this value and compare it against the interest saving balance.
- Interest Saving Balance: Take this number off your bill. Now look at whichever amount is larger, and pay that off.
- Interest Saving Balance: Use your interest saving balance as the next-to-last resort.
- Minimum Payment: This is the absolute minimum payment that you should make to ensure that your credit score isn’t hit.
What are the advantages and disadvantages of an interest saving balance?
The main advantage of using an interest savings balance is to limit the loan principle (or the credit card statement balance) on which you are charged interest and others (the APR) each month. If you pay the entire interest saving balance, your outstanding loan principle will actually fall slightly each month.
Banks and card issuers such as Amazon and Chase present the ISB as a way to stop your account from spiraling into debt. Effectively, it also ensures that they receive a specific amount from you, or at least a minimum, each month.
That, however, is where a potential disadvantage may arise. If you only pay the interest saving balance, it will still take a long time for you to eliminate your debt. This means that you continue to pay the crippling interest and other charges month after month. This is a big loss for you and a big fat profit for the bank!
Always remember that, you’ll pay interest on a loan or credit card for as long as there’s a balance. Some deals may let you pay 0% for a set period, however, check the timescales for this type of offer.
Why you should use your interest saving balance
We all run in to trouble from time to time and might find ourselves short-changed for cash. In such situations a credit card is quite handy because it lets you borrow some money without having to put in a loan application or jump through the hoops with a bank or a payday lender!
In such situations, paying your interest savings balance is a good idea if you’re unable to clear your full balance before the end of a monthly billing period. It can help to defer additional costs from stacking up. Paying the ISB will at least help you keep some of the extra costs under control. But this is at best a stop-gap measure and there are a few drawbacks to the system if you use it improperly, or don’t pay attention to the terms and conditions attached.
Ideally though, it would be best if you had an emergency fund so that you can just use that instead of having to borrow on your cards and then pay 20%+ interest rates on it!
Why you shouldn’t use your interest saving balance
The main reason for not using the interest saving balance is because you’re not really saving any interest! It’s not a discount offer and it’s not a loophole. As we discussed earlier, it is basically a new name for how things worked anyways – you get a 1-month grace period of any new purchases where you do not incur interest. After that, interest starts accruing on any unpaid balances.
If you are already carrying forward large balances on your credit card each month, you are already paying hefty interest on that and nobody is going to give you a discount on that. When you pay the ISB, all you are paying is your minimum payment for your previous statement balance and the amount on the new purchases. And paying only the minimum payment means you will likely carry the balance forward for many years – perhaps 10 to 15 years!
Paying off the interest saving balance might seem like an accomplishment. However as you continue to use your card month after month, any slipped or missed payments there will get promptly added on to your balance and boom – more interest!
Your goal should always be to pay off as much of the credit card balance as possible. At the bare minimum, your payments should well exceed the interest saving balance. This helps you get out of debt faster and most importantly – put all those heft interest costs and other charges in your pocket!
Finally, on top of this, consider your credit file in the long run. The longer you’re in debt, the worse it’s going to look on your credit record. That means, simply by just clearing the interest savings balance each month, you might struggle to borrow more money, secure a car, or buy a house in future.
Your credit file, admittedly, needs you to borrow money so you can build a positive profile with future lenders. However, if your history shows you are slow to pay off debt (for any given reason), future lenders will look poorly on your ability to repay.
Finally, be careful if you enter into a deal that offers 0% interest with interest savings balance as your default method of repayment. Once the 0% interest period expires, you’ll move onto the standard rate of APR, with your ISB as your standard method of repayment. Keep your eyes peeled before the changeover happens!
Why you should pay off your balance as soon as possible
The interest savings balance system appears to be a nice little service that banks and issuers like Amazon or Chase offer to help you manage your money, but to me it just appears to be a bit of marketing gimmick. You may think that you are actually doing well, but you’re really just paying the minimum payments on your card!
It’s always more beneficial for you to pay your balance in full as soon as you can.
- You’ll not avoid APR stacking up, which can add up to a big amount over the years
- You’ll help to keep your credit file and scores healthy
- You’ll have a better chance of borrowing more money at competitive rates in future
- You won’t have the burden of debt and interest looming over you
- You can avoid spiraling into debt, even if you have the best intentions of avoiding it
I perfectly understand that it’s not always possible to clear the full balance on a credit card regularly – especially when the economy is in flux and when interest rates and wages are out of sync!
That’s why you could still consider using your interest savings balance, but only as a tool to cut back on monthly expenditure as a last resort.
You should never fall back on your interest savings balance as a tool to continue delaying paying money you owe to a bank or card issuer.
Do I have to pay anything off my credit card each month?
Yes – you should never avoid paying your card issuer or bank the minimum fees they agree with you.
The majority of the time, credit card issuers and banks will request you pay at least an agreed amount on a schedule that you agree to. Failure to pay this can result in you defaulting on your arrangement, and may lead to debt collection.
Beyond that, failing to pay when you agree to on a schedule you signed off on will look poorly on your credit report! Always make sure to agree to credit arrangements you know you can feasibly afford and meet each month.
An interest savings balance can, in some ways, act as a great tool to help you avoid paying too much APR. However, on the reverse of this, it can and will keep you in balance with your lender.
That means you’re at risk of piling up debt and affecting your credit score in the long term. While I genuinely think it’s a great tool for some scenarios, you need to make sure you only use it sparingly – on a case by case basis.
Otherwise, where you can, pay off that balance and avoid falling into further debt. It’s not easy, but you’ll be better off in the long run. Try not to kick debt down the road if you can help it!
Should I pay the interest saving balance or statement balance?
If you can afford to do so, always pay the full value show for the statement balance (sometimes called Current Balance or New Balance). The interest saving balance does not really save you any interest over the long term and is just a misleading term. If you cannot pay the full statement balance, you should ensure that you still pay well over the interest saving balance. The more you pay off, the faster you will be out of debt!
How do I avoid paying interest on my credit card?
There’s only one way to avoid paying interest on your credit card – pay the entire balance by the due date listed on the bill.
What is current balance on credit card?
The current balance on your credit card statement reflects the total outstanding amount on your credit card. On some bills this could also be called the “New Balance”. The current balance is a total of your prior unpaid balances, the new purchases you made in the month, and the charges (interest and fees) that you incurred in the month.
by Brianna Johnson
Brianna Johnson, a Miami-based finance veteran, is a wealth advisor for high net-worth families. She loves to write and to share her knowledge. For PFF, she writes in-depth articles on finance and investments that help readers get unique insights. See more.