Why Carrying a High Credit Card Balance is Bad

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The rule of thumb with credit cards is that your balance should never be higher than 30% of your credit limit. The people with the best credit scores keep their balances below 10% of their credit limit. You may be disappointed to realize that you can only charge $1,500 of your $5,000 credit limit, but there are a few good reasons for keeping your balance low.

High balances hurt your credit score. A maxed out credit card (when your balance is right at the credit limit) could cause your credit score to drop 10 to 45 points, according to damage points scenarios from FICO.

When the ratio of your credit card balances to credit limit – your credit utilization – gets too high, your credit score suffers. The higher your balance gets the more your credit score suffers. So, one of the most important reasons for keeping a low balance is to keep a healthy credit score.

Big balances make it harder to qualify for other credit cards and loans. The amount of debt you have is one factor that credit cards and lenders consider when you apply for a new account. Lots of high balances can indicate that you’re in over your head with debt. Creditors will question whether you can actually handle another loan obligation. Keep your balances low to make yourself a more attractive borrower.

It’s expensive. 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.

Promotional interest rate periods are an exception, but pay off as much of your balance as you can during the promotional period so you’ll pay less interest once the introductory rate expires.

You’ll have a higher minimum payment. 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. Paying more than the minimum is always best to help you pay off your balance faster. However, if you’re ever in a bind and need to pay the minimum, a high credit card balance will make the minimum more expensive.

It puts you at risk of being in debt. People get into debt by borrowing more money than they can afford to pay back. Having a high credit card balance, especially on more than one credit card, doesn’t bode well for your debt situation. Keep your balances low, or paid off even, to avoid being in debt.

A high balance leaves less available credit for emergencies or other purchases. Say you need to rent a car or hotel stay on your credit card to avoid having the high authorization hold required with using a debit card for these transactions. If you don’t have enough room on your credit card, you’ll have to reduce your balance to free up some available credit. Keep your balance low and you won’t have this problem.

Sometimes you might make big purchases on your credit card, for example, to accumulate rewards or to pay for summer vacation.

However, it’s important that you pay these big purchases off quickly. Don’t let the balance linger too long or you’ll start to experience the negative side-effects mentioned in this article.

Increasing your monthly credit card payment will lower your credit card balance faster. For multiple credit cards with high balances, focusing on reducing one balance at a time is more effective than trying to pay them down all at once.