Why Carrying a High Credit Card Balance Is Bad

WomanPayingBillsOnline_JoseLuizPelaez_Getty.jpg
© Jose Luis Pelaez / The Image Bank / Getty

It doesn't take long to run up a high credit card balance. Sometimes all it takes is on purchase 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.

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, the more your credit score suffers. Keeping a low balance is better for your credit score.

It's harder to qualify for new credit cards and loans.

Credit cards and lenders consider the amount of credit card debt you have when you apply for a new account. Several high balances can indicate that you have more debt than you can handle. Creditors will question whether you can actually handle another loan obligation. Keep your balances low to make yourself a more attractive borrower.

High balances are more 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.

The minimum payment is higher.

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.

You're at a higher 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 help your debt situation. Keep your balances low, or paid off even, to avoid being in debt.

You have less available credit.

Renting a car and booking a hotel typically require a credit 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. Keep your balance low to 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 or take advantage of a promotional interest rate.

When you do make a large purchase on your credit card, it’s important to pay off the balance quickly. If you 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.