Impact to Your Credit Score
A maxed out credit card (when your balance is right at the credit limit) is harmful to your credit score, the three-digit number that gauges your creditworthiness. According to FICO, a high credit card balance could cause your credit score to drop more than 100 points, depending on the other information in your credit report. The amount of debt you’re carrying is 30% of your FICO score and when the ratio of your credit card balance to credit limit—your credit utilization—gets too high, your credit score suffers. It goes without saying, the higher your balance, the more your credit score suffers which means keeping a low balance is better for your credit score.
Qualifying for New Credit Cards and Loans
Among a few other factors, credit cards and lenders consider the amount of credit card debt you have when you apply for a new account. Carrying high balances on several credit cards could hint that you have more debt than you can handle, which causes creditors to question whether you can handle another debt obligation. Maintaining low balances makes you a more attractive borrower, which is particularly important if you’re preparing to apply for a mortgage or auto loan.
Cost of High Balances
Each month you don’t pay your balance in full, you’ll be charged interest in the form of a finance charge. These monthly finance 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 hundreds of dollars in a year, especially if you’re only making minimum payments.
Effect on Minimum Payments
Have you ever paid attention to how your credit card minimum payment moves in relation to your credit card balance? Minimum payments are typically calculated as a percentage of your credit card balance, 2% or 3% of the balance, for example. As your credit card balance grows, so does your minimum payment.
Risk of Debt
Debt happens when you repeatedly borrow more money than you’re willing to pay pack. Having a high credit card balance, especially on more than one credit card, doesn’t help your debt situation. Keep your balances low, or paid off even, to avoid being in debt.
Lower Available Credit
Renting a car and booking a hotel may require a credit card (vs. a debit card). With both transactions, the credit card issuer will place an authorization hold on a portion of your funds. If a high balance leaves you without enough available credit, you’ll have to reduce your balance, use another card, or, worse, postpone your trip. Using a credit card with a low balance helps you avoid having this issue. It’s not that you can’t make large purchases on your credit card. Using your credit card for large purchases allows you to accumulate rewards, meet the requirements for a sign-up bonus, or take advantage of a promotional interest rate.
