Is a Credit Card a Debit or Credit Balance?

Is a Credit Card a Debit or Credit Balance?
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If, like most people, you owe money to the credit card company, the outstanding debt is a credit balance to you but a debit balance from the credit card company's perspective. When you spend money using your credit card, the charge is credited to your account on your side but debited to the receivables account on the lender's side.

Understanding Double-Entry Accounting

The terms "debit" and "credit" originate from accounting entries made to record financial transactions. Every time a financial event occurs, whether it is a sale, new investment in a corporation or acquisition of new equipment, two entries are made.

One side of the balance sheet is debited, while the other is credited. As a result, the left and right sides, composed of "assets" and "liabilities plus shareholder equity" respectively, are always equal in aggregate. This system is referred to as "double-entry accounting" and is commonly used in general ledgers.

From the Borrower's Perspective

On your personal balance sheet, any liability account will have a credit balance whenever you owe money to the lender and a debit balance if the lender owes money to you. Since most credit cardholders owe money to the credit card issuer most of the time, the normal state of affairs is for the consumer to have a credit balance equal to her outstanding or current balance. When you make payments, the liability balance decreases with a debit on your side.

Keep in mind that credit card issuers make money by charging interest on the amount of money you owe and annual fees. However, the interest rates vary depending on credit scores.

If you are in good standing with lenders, you will have a higher credit limit and pay less in interest charges. mentions you can find out your scores via the available credit bureaus, such as Equifax, which can provide you with one free credit report per year.

Therefore, your total balance equals all credit card purchases plus interest charges added to your account during each billing cycle. Both the purchases you make and the interest accrued on your account are debited to your account. In addition, it is best to pay the total amount you owe on the due date or as soon as possible, instead of only making minimum payments. Alternatively, you can opt for balance transfer credit cards to reduce your credit card debt.

From the Lender's Perspective

From the bank's perspective, the outstanding credit card balance that you currently hold is a debit. This is because what you owe is an asset on the balance sheet from the bank's perspective. Every time you make a purchase at your favorite store, the bank debits its receivables to reflect the increase in what you owe. When you make a payment on your balance, it credits the receivables account.

Note, however, that the bank does not expect its customers to honor all their monthly payments eventually. It knows all too well that some people will end up with unpaid balances and default, and therefore, periodic adjustments are made to reflect this inevitable reduction.

Meaning of "Credit Balance" on Statement

You might sometimes see a mention on a credit card statement that you have a credit balance on your credit card. This comes from the lender's accounting perspective and means the lender owes you money. If, for example, you pay your outstanding balance in full every month and suddenly discover an erroneous past charge, you may receive a credit equal to that amount.

In other words, the money that was mistakenly added to your total outstanding debt may be returned to you. So, after receiving your credit balance refund, your credit card statement balance may have a net credit, explains the Consumer Financial Protection Bureau.

If, for instance, you had a zero net balance when a mistaken past charge was discovered and $100 was returned to you, your new balance will be a $100 credit. If you were then to make a credit card purchase for $250, the net balance after this transaction is a debit of $150.

Typically, your credit card bill or statement will help you get a better idea of what you owe, including whether you have a positive or negative balance in your credit card account. Also, it will let you know if there are any late fees you may need to pay.