Your credit card balance does not only affect the total amount of money you have to repay your creditor, but your credit score as well.
Here’s an example:
Norman has 5 credit cards. One of his cards has a balance which exceeds 75% of its credit limit while 4 other cards have zero balance. What is the impact of keeping a high balance on 1 card? Can he expect a negative impact on his credit score?
A huge debt load on one card has a serious impact on Norman’s credit score. It is true, he has zero balance on other cards, but for Norman to maintain a good credit standing his debt level should stay below 30% of his available credit limit. This is because, reporting agencies such as FICO uses not only the total amount of debt owed, but also the utilization rate in gauging a borrower’s credit risk.
The percentage at which you are using your available credit in each credit card makes up the total utilization rate. So, avoid the serious impact of carrying such a substantial debt load on just one of his credit cards.
For example, assuming the five cards have the same credit limits, Normal should have charged 15% in each card instead of getting the whole amount of debt from a single card. But, since the best balance is zero, he can also spread the amount among three cards, as long as they’re still below 30% of the credit limit, while two others have zero balance.
What if you only use one credit card to keep yourself from overspending? You have two options: you can pay off your balance before the closing date for credit card account statement when the credit card providers submit the report of your card details to the credit bureau. Another way to do this is to pay the amount you charged on your credit card on the same day so it will not reflect on your credit report.
In a nutshell, here are the three ways in which your credit score may be affected by your credit card balance:
- A low level of debt means you are using debt responsibly.
- A lower credit card balance compared to your credit limits can give you a higher credit score.
- A higher credit card balance compared to will lower your credit score
Driving up your credit balances has an adverse impact on your credit score. While the amount of balance matters, your credit utilization rate would drastically go down if your utilization rate is higher than 30%. That means, making minimum payment cannot compensate for a high percentage of credit limit use.
Credit bureaus often put a lot of weight on the credit limit utilization. If you are making minimum payment each month to keep balances lower than 30% of your credit limits on revolving accounts, it will have a positive impact on your credit standing.
Experts suggest that paying down a hefty card balance is still more advisable than doing a balance transfer on all other cards. It is because having a high level of debt could signify a serious financial problem that cannot be solved by a simple balance transfer. It is also important to analyze how you got in serious debt in the first place. Start by asking requesting for a credit report. Or, you can simply contact the Clean Credit team to clean up and repair your credit file.