Why is it Bad to Carry a High Credit Card Balance?
It actually does not take long for one to run up a credit card balance that is high. Sometimes all it takes to reach a high amount for your balance that is at or near your credit card’s credit limit is one large purchase, be it a new furniture purchase, a vacation, or any sort of holiday purchases. Even though the providers of credit cards in the market give cardholders quite great flexibility in terms of paying off their outstanding dues, having a high balance on your credit card can be harmful to you for many reasons.
Impact on Your Credit Score
Maxed out credit cards, i.e. when the balance on the credit cards that you own are right at the credit limit assigned, are harmful to one’s credit score. Your credit score is a 3 digit number that helps banks and financial institutions determine your creditworthiness. According to the experts, holding a high balance on your credit cards can have a large impact on your credit score in a negative manner.
The amount of debt that you are carrying holds a large part of your credit score. When the credit utilization ratio, i.e. the ratio of the balance on your credit card as to the available credit limit, reaches a high percentage, your credit score tends to suffer.
It goes without mentioning, the higher the outstanding dues on your card, the more will your credit score suffer. This is what makes it ideal to keep a low balance so that your credit score is not hampered in any way.
Qualifying for Loans and New Credit Cards
Among several other factors, an important factor that the credit card providers and loan lenders consider is the total outstanding credit card that one carries while applying for this new credit. If you are carrying high dues on different credit cards, you could be implicating that you are carrying debt on your shoulders than you can actually handle. This causes the lenders to doubt you when it comes to handling another debt obligation.
Cost of High Balances
For every month in which you do not pay the balances on your credit cards in full, the credit card provider will charge you interest as a finance charge. These finance charges for the month are calculated depending on your outstanding credit card dues and your rate of interest. The higher is the balance that you have, the higher will be finance charges levied. Carrying high balances on your credit cards can cost you a lot of money in one year, especially if all you pay off are the minimum monthly payments.
Effects Your Minimum Payments
Have you ever went ahead and noticed how the minimum payment on your credit card moves relative to the balance on your credit card?
The minimum monthly payments are generally calculated as a certain percentage of the balance on your credit card, for example, 2-3% of your balance. As the balance on your credit card increases, so will the minimum monthly payment.
Risk of Taking on Debt
There is debt on your shoulders when you repeatedly borrow funds more than you are willing to repay. Holding high balances, especially on multiple credit cards, does not really help the situation of your debt. It is best to keep your balances low or even completely paid off so that you can avoid being in any sort of debt at all.
Lesser Credit Available
When it comes to making hotel reservations or maybe renting a car, they might require one to hold a credit card as opposed to a debit card. In case of both the transactions (hotel booking or car rental), the provider of your credit cards will put an authorization hold on a particular portion of your available funds in the account.
If you are holding a high balance on your credit cards, it will leave you in a situation wherein you will not have enough credit available to you. In any such scenario, you will be required to either reduce the outstanding balance on your credit card, use another alternative from the credit cards you own, or, the worst scenario possible – postpone your trip. Whereas, if you hold a credit card that has a low balance, you will be able to avoid any such problems occurring that might hamper your plans.
To Further Conclude
It is not that you cannot make any sort of large purchases on your credit cards. Making use of credit cards for any large purchases allows you to accumulate the rewards that your credit card provider offers, meeting the bonus requirement set by the card provider, or take advantage of any promotional rate of interest. However, always remember 3 key points, they are:
- Carrying high balances on your credit cards also carries a high number of risks from less access to the credit limit that is allotted to you on your card to damages caused to your credit score.
- Increasing the payments that you make every month to clear off your credit card dues will help you in lowering the total outstanding balance on your credit cards.
- If you are holding a number of credit cards that have high balances on them, focus on lowering and paying off one balance at a time. This method is more effective as compared to trying to pay all of them down in one go.