Does Credit Card Balance affect your credit score? Can carrying balances actually hurt your credit?
Credit cards are a necessity for anyone who wants to maintain good credit. Those who wish to own cars, homes, or property must figure out how to use credit to their advantage so that the balances do not harm their credit score. There are a few important factors that credit card users must consider to stay on the positive side of the credit scores to appeal to potential credit issuers.
Ways Credit Card Balance May Affect Credit Score
Yes, credit card balance can affect or hurt credit score. Credit utilization is the most important factor in determining if a person’s credit score has a negative or positive affect. Credit utilization is the credit limit to debt ratio on credit cards. Credit lenders use this model to determine if a potential cardholder receives credit. Credit card holders should know that 30 percent of their credit score is determined by the amount owed on all credit cards. This is a pretty significant number to remember for those who want to maintain a good credit score.
Consider a few scenarios to determine if the balance on credit cards affect or hurt credit score. Here are two scenarios to consider.
Credit Card Balance Scenario 1
Credit cards with low utilization can hurt or harm credit score. Some people think that carrying a zero balance on all credit cards helps their credit but it does not. Carrying a zero balance on a few credit cards may help. When all credit cards are paid off each month, credit users may see a slight drop in their credit score. Paying off all credit card balances each month may cause creditors to stop reporting updates to credit agencies or prompt the credit card company to close the account. Both of these situations can hurt cardholders because it lowers their credit score slightly. This scenario can affect the cardholders’ potential to receiving credit, depending on what the current credit score is.
Credit Card Balance Scenario 2
Paying off or paying down credit cards with high credit balances may help a person’s credit score. Remember that credit card balances contribute to 30 percent of the credit score that consumers receive. Paying off the debts of credit cards can boost a credit score significantly because cardholders reduce debts and increase available credit on credit cards. Cardholders that have only one credit card my harm their credit a bit. Paying off the credit card my temporarily raise their credit score in the beginning, but lower the score later if there is no activity on the credit card after it has been paid off. Paying the credit card down can help cardholders continue to maintain good credit scores.
Tips for Keeping a Low Credit Card Balance
The debt to credit limit ratio is very important in determining credit score. Here are a few simple tips to follow to maintain good credit scores and keep credit card balances low.
- Cardholders should only charge necessary items each month. Charging items like utilities and medical bills to credit cards helps to keep balances low. A pair of shoes or a new pair of jeans is not a necessity. These items can wait until extra money is left over from a future paycheck.
- Remember that the debt to credit limit ratio must remain low. All credit cards should have at least half of the credit limit available to use. It is a good idea to keep the debt at round 10% to 25% of the available limit each month to help maintain a good credit score.
- Rotate credit card use. Another good way to keep balances low on credit cards is to use one card at a time. Cardholders that have more than one credit card should use one credit card at a time and keep the balances low. Keep a small balance on the card used and a zero balance on the other cards so that creditors have something to report to credit agencies.
- Do not close any accounts. Credit history plays an important role in credit score. 15% of the credit score is determined by credit history. Closing any credit card accounts—especially an older account—can reduce the credit score. Instead, charge small amounts to the credit card to maintain a low credit card balance.
Maintaining a good credit score and keeping low credit card balances can be very tricky for cardholders. Always remember that it is better to have more than one credit card and keep balances low instead of paying off the balances each month in order to maintain a good credit score.