Why Carrying a High Credit Card Balance Is Bad

Influence on the Value of Your Credit Score

Your credit score, which is a three-digit figure that indicates your creditworthiness, will suffer if you use a credit card until it is completely maxed out, which occurs when your balance is exactly equal to the credit limit. According to FICO, having a large load on a credit card may cause your credit score to decline by more than 100 points, however the exact amount your score falls might vary based on the other information in your credit report.

Your credit score is negatively impacted when the ratio of your credit card balance to your credit limit, also known as your credit usage, is too high. This is because the amount of debt you are carrying accounts for 30 percent of your FICO score. It should go without saying that the greater your debt, the more damage it does to your credit score; hence, maintaining a low amount is preferable if you want to protect your score.

The Price Paid for High Balances

If you do not make a complete payment toward your debt at the end of each month, you will be subject to interest in the form of a finance charge. Your credit card balance and the interest rate used to compute these monthly financing charges are both taken into consideration. The bigger your outstanding debt, the more the interest you will be charged on it. Keeping a large load on your credit card may cost you hundreds of dollars over the course of a year, particularly if you are only paying the required minimum payments.

Obtaining Eligibility for New Loans and Credit Cards

When you apply for a new account with a credit card company or a lender, they will look at a number of criteria, one of which is the total amount of credit card debt you have. When you carry large amounts on many credit cards, it may give the impression that you have more debt than you are able to manage. This leads creditors to doubt whether you are capable of meeting further financial obligations.

Your ability to keep your balances low makes you a more desirable borrower, which is especially crucial if you are getting ready to submit an application for a mortgage or a car loan.

Risk of Debt

When you consistently borrow more money than you are prepared to pay back, you put yourself in a position where you have debt. Your financial condition will not improve if you have a big load on your credit card, particularly if that sum is spread over many credit cards. To prevent falling into debt, make sure your amounts are modest or even paid off completely.

Implications for the Required Monthly Amounts

Have you ever paid attention to how your minimum payment on your credit card changes in proportion to the amount on your credit card? Standard practice dictates that the amount of your minimum payment be determined as a percentage of the total balance remaining on your credit card; for example, this may be 2% or 3% of the total balance. Your credit card company will raise your minimum payment according to the amount that you owe on your card.

Less Credit That Is Available

It’s possible that you’ll need a credit card in order to rent a vehicle and make hotel reservations (vs. a debit card). Both of these purchases will result in the credit card issuer freezing a part of your available money in the form of an authorization hold.

If you have a large debt and not enough available credit, you will need to either lower your amount, use another card, or, even worse, postpone your trip until you have more available credit. You may avoid having this problem if you use a credit card that has a low available balance.

It’s not that you can’t use your credit card to make significant purchases; in fact, you can. When you make significant purchases with your credit card, you may earn points, fulfill the conditions for a sign-up bonus, or take advantage of a special interest rate.

1. When you carry a load on your credit card that is too large, you expose yourself to a variety of problems, some of which include having your credit score suffer and having less access to your credit limit.
2. Increasing the amount that you pay on your credit card each month can allow you to pay off your debt more quickly.
3. When you have numerous credit cards with large amounts, it is more beneficial to concentrate on decreasing one debt at a time as opposed to attempting to pay them all down at once.