How carrying a balance can affect your credit
Carrying a balance on your credit card means you’ve paid off a portion of what you owe and carried the rest over to the next billing cycle. There are lots of reasons you might carry a balance.
But it’s important to know the ways carrying a balance can impact your credit and finances. They include adding interest charges and impacting your credit score.
What you’ll learn:
-
If you carry a credit card balance, the card issuer may charge interest on what’s left over as well as on any new purchases.
-
Not keeping up with minimum payments could impact your credit scores if the lender reports that activity to the credit bureaus.
-
Paying off your credit card each month can help you avoid interest charges and maintain a lower credit utilization ratio.
Does carrying a balance affect your credit scores?
Carrying a credit card balance can affect your credit scores in several ways. However, the biggest impact is generally on your credit utilization ratio.
Credit utilization is a measure of how much of your available credit you’re using. It’s a comparison of the reported balance and the credit limit on revolving credit accounts. For example, if you have a $1,000 balance on a single credit card with a $4,000 credit limit, your utilization rate is 25%.
According to the Consumer Financial Protection Bureau, experts recommend keeping your credit utilization below 30% of your total available credit.
Credit card issuers often report balances around the end of the statement period. With many cards, this happens around three to four weeks before the next bill is due. As a result, you could make credit card payments in full every month and see the unexpected balances and credit utilization reported.
If you aren’t able to pay your balance at all, your credit card issuer could report the missed payment to one or all three major credit bureaus.
Is it better to carry a balance or pay it off?
When you can, it’s generally a good idea to pay off your credit card balance instead of revolving the debt. You may have heard that carrying a small balance will help your credit, but that’s a credit myth.
If your card has an introductory 0% APR offer, that could give you more time to pay down your balance without accruing interest. Just be aware that carrying that balance could still impact your credit utilization ratio—and ultimately your credit scores. Plus, once the introductory 0% APR offer ends, the standard APR kicks in. And that’s when interest starts to accrue.
If you’re carrying a high balance and interest charges, it’s a good idea to consider ways to pay off credit card debt.
Benefits of paying off your credit card
There are several benefits of paying your credit card balances in full each month. Some are related to your credit scores, while others are related to personal finances and creditworthiness. Take a closer look at some of the ways paying off your credit card may benefit you.
It can help you avoid interest charges
Paying your card in full each month by the due date can help you avoid paying interest on new purchases. If you’re struggling to make payments on time or have accrued interest, you could consider a balance transfer. A balance transfer card could let you take advantage of a low introductory APR to pay off a high-balance credit card.
It can help you maintain a lower credit utilization ratio
If you don’t accrue interest or let your balance grow during your statement period, it may be easier to maintain a low credit utilization ratio.
It can lower your debt-to-income (DTI) ratio
Some lenders consider DTI ratio, which is a comparison of your monthly income and debt payments. Carrying a credit card balance can lead to a higher DTI ratio, which may make it more difficult or expensive to borrow money.
FAQ about carrying a balance on a credit card
Here are answers to common questions about carrying a balance on your credit card.
How quickly does paying off a credit card balance affect credit scores?
In general, it may take a few months for someone to notice a change in their credit scores after paying off their credit card balance. Credit card issuers typically send the credit bureaus monthly updates after the end of a cardholder’s billing cycle. So how soon the payment is reported depends on where the cardholder is within that cycle—and also whether they continue to use the card.
Does closing a credit card with a balance impact your credit scores?
Closing a credit card either with or without a balance can reduce the length of your credit history. It can also increase your credit utilization. Both can negatively affect your credit scores.
And keep in mind that closing a credit card that still has a balance doesn’t mean that debt is gone. You’re still responsible for paying off the remaining balance.
How can you avoid carrying a balance on your credit card?
The only way to avoid carrying a balance on a credit card is to pay the card off in full every month.
If you’re having trouble managing credit card payments, it may help to plan and create a budget.
Key takeaways: Carrying a credit card balance
Paying off your credit card balance in full every month could help you avoid interest charges. It could also help you manage your credit utilization ratio, which can help your credit scores.
If you need to carry a balance, try to make at least the minimum monthly payment on time to keep your account in good standing.
Explore more from Capital One
New to credit or looking for your next credit card?
-
Check for pre-approval offers with no risk to your credit score.
-
Earn unlimited 1.5% cash back on every purchase, every day with Quicksilver.
- Explore Capital One’s credit cards for building credit with responsible use.
