Why Carrying a High Credit Card Balance Is Bad

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It doesn't take long to run up a high credit card balance. Sometimes all it takes is one large purchase—new furniture, a vacation, or holiday purchases—to put you at or close to your credit limit. Even though your credit card issuer gives you a lot of flexibility to repay your balance over time, having a high credit card balance is bad for you for several reasons.

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.

You won't be charged any interest if your balance falls under a zero interest promotional period, even if you don't pay your full balance each month.

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.

When you can't afford to pay in full, paying more than the minimum is always best to pay down your balance faster.

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.

  • Carrying a high credit card balance carries a number of risks from damage to your credit score to less access to your credit limit.
  • 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.

Article Sources

  1. Fair Isaac Corporation. "FICO Consumer Credit Activity Infographic." Page 1. Accessed Apr. 8, 2020.

  2. Fair Isaac Corporation. "Amounts Owed." Accessed Apr. 8, 2020.

  3. Bank of America Corporation. "How Mortgages Are Approved." Accessed Apr. 8, 2020.

  4. Discover Bank. "What Are the Requirements for a Credit Card?" Accessed Apr. 8, 2020.

  5. Capital One. "Credit Card Minimum Payments Explained." Accessed Apr. 8, 2020.

  6. Marriott International, Inc. "Digital Entry Terms of Use." Accessed Apr. 8, 2020.

  7. The Hertz Corporation. "Rental Qualifications and Terms." Accessed Apr. 8, 2020.