Credit Cards

Will having a large credit card balance hurt your credit score?

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In many cases, yes, that high balance affects your score.

Key points

  • Credit utilization is an important factor in calculating a credit score.
  • If you owe a lot of money on your cards, your score could suffer, even if you’re making your minimum payments on time.

There are many reasons why you might have a large credit card balance. Maybe you lost track of your spending or have holiday debt. Or maybe the rising cost of living has forced you to resort to using your credit cards (if so, you’re not alone).

Regardless of why you have credit card debt, you need to understand the impact a higher balance can have on your finances. Too large a balance could hurt your credit score, even if you can make your minimum payments on time.

It is about the use

Your payment history, which speaks to how punctual you are with bills, is the most important factor in determining your credit score. Therefore, it is important to pay your credit card bills on time each month.

If you make your minimum payments but transfer a balance, you’re considered current on that debt, which is a good thing. The problem with carrying too high a balance, however, is that it can still increase your credit utilization ratio.

Your credit utilization ratio is a measure of how much of your available revolving credit you are using. And it’s the second most important factor in calculating your credit score, right behind your payment history.

Once your credit utilization ratio exceeds 30%, your credit score may drop. And too large a credit card balance could lead to that. Let’s say you owe $5,000 on your credit cards. If your total available spending limit on all your cards is $20,000, then from a credit score perspective, you’re not in bad shape at 25% utilization.

But if you owe $5,000 against a total spending limit of $10,000 on all your credit cards, that’s a 50% credit utilization ratio. That’s well above that 30% threshold and enough to do some serious credit score damage.

How to reduce your credit utilization ratio

If you have a large credit card balance relative to your credit limit, you can lower it and your usage will go down. But there’s another tactic you can employ: ask your credit card issuers for a spending limit increase. This may work if you’ve made your minimum payments and have been an account holder in good standing for a few years.

Returning to our example, let’s imagine you increase your credit limit from $10,000 to $18,000 on all your cards. In that case, a balance of $5,000 leaves you with a credit utilization ratio of about 28%, which could increase your credit score.

Of course, getting that much of a credit limit increase may not be easy. But it’s worth a try. At the same time, it pays to reduce your debt as quickly as possible, whether that means cutting back on spending to free up cash or increasing your income with a side job. Credit card debt is worth getting rid of, regardless of its impact on your credit score, so the sooner you can eliminate yours, the better.

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