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. Here are a few of them…
What makes a high credit card balance limit, a big no-no?
A credit card can at once be both a blessing and a curse. While it offers the convenience of cashless transactions, a cardholder must also bear the responsibility of using the piece of plastic in a careful and thrifty manner. With a credit card in hand, many consumers are tempted to spend more than they can pay off. Meanwhile, there are others who frequently max out their cards without realizing the negative effects of such actions. The general rule to be followed with credit cards is that your balance should not surpass 30% of your credit limit. Ideally, you should ensure that it remains below 10% at all times. Here’s what can happen if you get into the habit of carrying a high balance on your credit card:
Impact on your credit score
A maxed-out credit card (when your balance is right at the credit limit) is harmful to your credit score, which is the three-digit number that gauges your creditworthiness. Experts say that 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. When the ratio of your credit card balance to the credit limit, i.e. 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. Thus, the institution may turn down your application for a new loan altogether. 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.
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.
Cost of high balances
Each month you do not 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 dirhams in a year, especially if you are only making minimum payments.
Risk of debt
Consistently carrying a high balance could lead to a situation where you have borrowed more than you can pay off. Debt happens when you repeatedly borrow more money than you are 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.
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Lower available credit
One of the boons of a credit card is that you can use it to borrow money for various purposes, like funding your business or for emergencies such as hospitalization. But if you are already carrying a high balance, you may not be able to use your card for that particular need. With all 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 will have to reduce your balance, use another card, or, worse, cancel your expense altogether. So, using a credit card with a low balance helps you avoid having this issue.
Points to remember
As a general rule of thumb, always make sure that you keep the following points in mind when it comes to your credit card balance:
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.
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. Of course, there may be situations where even though your credit utilization ratio is low, your authorized limit is just not high enough to allow you to use your credit card for your desired purpose. In such cases, you can request that your card company increase your limit.