Effects of Credit Card Balance on your Credit Score
Does credit card balance affect your credit score in any way? What does it mean to carry a balance on your credit balance? These are types of questions you will likely hear from somebody that is a new user of credit card. Just in a simple sentence, credit card balance is the amount you owe on your card to your card issuer per time. The balance can be positive or negative at times. If the balance is positive, it means that you are the one owing your card issuer. But if the balance is negative, which is very unusual, it means that it is your card issuer that is owing you instead. How is it possible for your card issuer to be owing you? I mentioned that this is unusual but it does happens. It happens when you overpay your credit card balance. For instance, if your credit card balance is $1,250 and you mistakenly paid $1,520, this means that you have overpaid your account by $270. This amount will appear as a negative balance in your account. While the credit card may not necessarily refund this money to you, you will have the amount available for future purchases. Let’s assume that you later make a purchase worth of $1,000 in the month following, instead of having $1,000 as your credit card balance, the balance will be net of $270. That is, the overpayment of $270 will be deducted from your purchases. This will make your new balance to be $730.
What is a good credit card balance?
Is it good to carry balance on your credit card? If yes, what is a good credit balance? Should you carry positive or negative balance on your card? How much balance should you carry on your credit card? Let’s address these questions one by one.
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Before you can have a balance in your credit card, transactions must have taken place. Credit card balance usually comes as a result of purchases you made with your card. Any time you use your credit card to make purchases, you are simply borrowing money from your card issuer. You will be allowed to make purchase with your card as long as you stay within the approved limit. Until you make payment on the account, the purchase amount will remain as a balance on the credit card. While it is not compulsory that you pay off the total balance on your credit card at the end of your billing cycle, your card issuer will expect that you, at least, make a minimum payment. Minimum payment should be able to cover the interest charge on the credit card balance, fee and small portion of the principal. You should understand that you will not need to pay interest on your card balance if it is fully paid within the grace period after your billing cycle. It is when you have unpaid balance on your credit card that interest will accrue. Therefore, your actual credit card balance will be the addition of your recent purchases, the unpaid previous balances, accrued interest and any fee charged to your credit card during the period. If you notice that your credit card balance is actually higher than the amount of purchases you made in a given period, interest and fees such as annual fee or penalty fee may account for this.
So, should you carry balance on your card? It is not compulsory that you should carry a balance in your card. If you want to use your credit card, you should just ensure that you use it responsibly. You need to still use the card to make purchases. But it is good that you pay the balance on the card in full at the end of each month. This will help you establish good payment history. Payment history is one of the vital criteria that credit bureaus use in calculating your credit score.
What is a good credit balance? The amount of balance that you carry on your card per time matters a lot. But what makes a good credit balance is relative. It is not about the amount. It has a lot to do with your credit limit. But carrying excessive credit card balance will definitely hurt your credit balance. It will lower your available credit. It is possible for someone to carry $1,500 as a credit card balance and that balance is still consider good. On the other hand, another person may be carrying just $500 and that amount may no longer be considered as a good credit card balance. Let me explain so that you will have a better understanding of the scenario. Let’s assume that the credit limit of the person having $1,500 credit card balance is $6,000, his credit utilization ratio will be 25%. If the credit limit of the second person is just $1,000, his credit utilization will be 50%. If you want to use your credit card to build your credit score, experts suggest that credit utilization ratio should be kept below 30%. So, looking at the two instances above, it is not the amount of balance that you carry in your card that matters. You should not look at your credit card balance in isolation of your credit limit. I believe I am not confusing you. Let me briefly explain some of the terms that I used. What is credit limit? Credit limit is the maximum balance you can carry on your card. If you have reached your credit limit, you will no longer be able to use the card to make further purchase unless you first make payment on the card. This will help you reduce the credit card balance. When you apply for a credit card, your card issuer will consider many factors before arriving at the credit limit that will be approved for you. Your credit card limit will be set around the amount that you will be able to pay back. While you may want to have high credit limit, no card issuer will be willing to approve the credit limit that is above what you will be able to pay back. Credit utilization ratio on the other hand is your credit card balance in relation to your credit card limit. The lower your credit utilization ratio, the better. It suggests that you don’t have financial pressure. But if your credit utilization ratio is too high, it can be an indication that you have too many financial obligations which make you to almost exhaust your credit limit. For this reason, it may be a good idea to monitor your credit card balance.
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Is it good to carry negative credit card balance? Well, I don’t see any reason why you should choose to carry negative balance on your credit card. It will just amount to tying your money down. Your card issuer will not pay interest on the amount neither does it have any extra positive effects on your credit score.
How to check your credit card balance
There are different ways by which you can check your credit card balance so that you don’t charge too much amount to the card. Few of these are explained below:
From websites: If you want to check your credit card balance, you can visit websites like Getmybalance and Myreadycard that offer such services and enter your card number. Your card number is the 16-digit number in front of your card. Also, you will be asked to enter security code. However, I prefer using other methods below.
Call your customer service: If you look at the back of your credit card, you will find the contact telephone number of customer service of your card issuer. Place a call to them to get your credit card balance.
Login to your card issuer’s portal: If you want more detailed information such as details of transactions on your card, you can log in to your card issuer’s portal. However, it may take 24 hours for some items to appear on the list of transactions that have occurred on your card.
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Effects of High Credit Card Balance
- Higher interest: Paying interest on credit card is totally avoidable. If you pay your balance in full at the end of each billing cycle, you will not be charged any interest on your credit card balance. But if you only make minimum payment or you don’t make full payment, you will need to pay interest on any unpaid balance. Carrying balance does not mean that you will pay higher interest rate, except when late penalty is applied. What I mean by paying higher interest is that, the more credit card balance you have, the more interest amount you will pay. For instance, let’s use a simple interest rate calculation as an example here. 10% interest rate on $1,000 is $100. But if the amount is increased to $5,000, applying the same interest rate of 10% will result to $500 interest.
- High minimum payment: Even if you are not making full payment on your card, you still need to pay a certain percentage of the amount you are owing at the end of the billing cycle. The amount should be able to cover the interest on the card balance, any applicable fee and small portion of the principal. Therefore, with high card balance, expect your minimum payment to be high too.
- Inability to get new credit or loans: If you carry large credit card balance, your debt-to-income ratio may be too high. This may make it difficult for you to get new credit or loans. Even, if you are able to get new credit or loans, it may be at a very high interest rates.
- Difficulty in paying back: It is not easy to pay back debts. When it comes to loan repayment, remember that you will not only pay back the principal. You will still need to pay back the interest. When the credit card balance is too high, chunk of what you pay may just be going towards the interest while the principal still remains. If conscious steps are not taken to quickly pay off the debt, one can remain in debt perpetually.
- Available credit: There is credit limit placed on every credit card. If you are already carrying large balance on the card, you will not have much credit available to make further purchase.
- Negative impact on credit score: The overall effects of all the points discussed above is that, your credit score may suffer if you carry too much balance on your card.