Does Carrying a Balance Hurt Your Credit Score?

When you have credit cards and you do not pay off the amount due at the end of each billing cycle, you will carry a balance on your account. Does carrying a balance hurt your credit score? Credit cards are a modern convenience, that when used responsibly, can make financial transactions easier for consumers. You can use them when a financial emergency comes up as a short term loan, without having to spend the time making application for a loan with a lender.

They can be used to build your credit history especially if you’ve never taken a loan before. However, if you have a credit card with a high balance, or you have multiple cards with balances, you will find that this has a negative impact on your credit score.

Anytime you make application for a credit card and are approved, the lender will set a limit on the maximum that you can charge on the card. As you make purchases the balance on the card increases. If you do not pay the full amount at the end of each billing cycle, the company will charge you interest on the unpaid balance. If your payment is late or you go over your card limit the lender will charge you a fee for each of these actions. There may also be annual fees for use of the card or account maintenance charges.

The balance on your credit card(s) directly affects your credit score. Fair Isaac the company who is credited with invention of the credit report scoring system, FICO, states that the balance on each credit card you have, loan installment account, mortgage payments, and car loans are all used in arriving at your credit score. These accounts make up 30 percent of your FICO score. The higher the balance you have on these accounts the lower your FICO score will be.

If you have reached the limit that the lender set for your card, your credit score will be at its lowest. Even if you are not at the lowest on your score because you are at the limit on your card, if you carry a large balance you will still have a negative impact on your credit score. CNN Money interviewed Rex Johnson, credit expert, and he stated that you lose one point on your FICO score for every percent of credit limit you exceed.

If you have no balance or a much smaller balance than your available credit limit, you can improve your credit score. CNN Money reports that your balance should not exceed 30% of your available credit. The thirty percent figure would include all applicable fees associated with use of the card. If your balance is higher than 30% you need to pay down the balance to increase your score. If you pay on time each month these payments will help improve your score as well.