It doesn’t take long for your credit card balance to rise. Sometimes, all it takes is one large purchase – new furniture, a vacation, or holiday shopping – to put you at or near your credit card limit. Although the credit card issuer gives you a lot of flexibility in paying off your balance over time, carrying a high credit card balance is bad for you for several reasons.
Its Impact on Your Credit Score
A maxed-out credit card (when your balance is right at your credit limit) is harmful to your credit score, which is the three-digit number that measures your creditworthiness. According to FICO, a high credit card balance can cause your credit score to drop by more than 100 points, depending on the other information in your credit report.
The amount of debt you carry counts for 30% of your FICO score, and when your credit card balance-to-credit limit ratio – your credit utilization – becomes too high, it negatively affects your credit score. Clearly, the higher your balance, the more your credit score is affected, meaning keeping a low balance is better for your credit score.
Qualifying for New Credit Cards and Loans
While credit card companies and lenders consider some other factors, they also take into account the amount of your credit card debt when you apply for a new account. Carrying a high balance on multiple credit cards may indicate that you have more debt than you can handle, leading lenders to question whether you can manage another debt obligation.
Maintaining a low balance makes you a more attractive borrower, which is especially important if you’re preparing to apply for a mortgage or auto loan.
The Cost of High Balances
For every month that you do not pay your balance in full, you’ll incur an interest cost in the form of a monthly finance charge. These monthly charges are calculated based on your credit card balance and your interest rate. The higher your balance, the higher your finance charges will be. Carrying a high credit card balance can cost you hundreds of dollars a year, especially if you’re only making the minimum payments.
Note: You won’t be charged interest if your balance is under a promotional zero-interest period, even if you don’t pay your full balance each month.
Its Effect on Minimum Payments
Have you ever noticed how your credit card’s minimum payment shifts in relation to your credit card balance? Minimum payments are typically calculated as a percentage of your credit card balance, such as 2% or 3% of the balance, for example. The higher your credit card balance, the higher the minimum payment will be.
Note: When you can’t afford the full payment, paying more than the minimum is always better for paying down your balance faster.
The Risks of Debt
Debt occurs when you repeatedly borrow more money than you are willing to pay back. Carrying a high credit card balance, especially on multiple credit cards, does not help your financial situation. Keep your balance low or even paid off entirely to avoid falling into debt.
Reducing Available Credit
Renting a car or booking a hotel may require using a credit card (instead of a debit card). With each of these transactions, the credit card issuer will put a temporary hold on a portion of your funds.
If
Your high balance leaves you with insufficient available credit, so you will have to either reduce your balance, use another card, or, worse yet, postpone your trip. Using a credit card with a low balance helps you avoid this problem.
It is not impossible to make large purchases using your credit card. Using your credit card for big purchases allows you to earn rewards, meet sign-up bonus requirements, or take advantage of a promotional interest rate.
Carrying a high credit card balance carries many risks, from damaging your credit score to reducing your access to your credit limit. Increasing your monthly credit card payment will reduce your credit card balance faster. For multiple credit cards with high balances, focusing on paying down one balance at a time is more effective than trying to pay them all off at once.
Was this page helpful?
Thank you for your feedback!
Let us know why!
Sources:
– Fair Isaac Corporation. “FICO Consumer Credit Activity Infographic. Page 1.”
– Fair Isaac Corporation. “Amounts Owed.”
– Bank of America Corporation. “How Mortgages Are Approved.”
– Discover Bank. “What Are the Requirements for a Credit Card?”
– Capital One. “Credit Card Minimum Payments Explained.”
– Marriott International, Inc. “Digital Entry Terms of Use.”
– The Hertz Corporation. “Rental Qualifications and Terms.”
Source: https://www.thebalancemoney.com/why-carrying-a-high-credit-card-balance-is-bad-960271
Leave a Reply