How carrying a credit card balance can affect your credit
Carrying a balance on your credit card means you’ve paid off a portion of what you owe and left the rest for the next billing cycle.
There are lots of reasons you might carry a balance. But it’s important to understand how it might affect interest charges, credit scores and more.
What you’ll learn:
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If you carry a credit card balance, the card issuer may charge interest on what’s left over and any new purchases.
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Paying off your credit card each month can help you avoid interest charges and maintain a lower credit utilization ratio.
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Paying late or paying less than the minimum credit card payments could impact your payment history and credit scores.
Does carrying a balance affect your credit scores?
Carrying a credit card balance can affect your credit scores in several ways.
Credit utilization ratio
One major impact of carrying a balance is to your credit utilization ratio.
Credit utilization is a measure of how much of your available credit you’re using across all your revolving credit accounts. Credit cards are a common type of revolving credit. According to the Consumer Financial Protection Bureau (CFPB), experts recommend keeping your credit utilization below 30% of your total available credit. Here’s an example: Say someone has only one credit card. And it has a $1,000 balance and a $4,000 credit limit. In that case, the utilization ratio is 25%.
Credit card issuers often report balances around the end of an account’s 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 still see a balance and credit utilization on your credit report that are different from what you expect.
Payment history
Payment history is another major factor in calculating your credit score.
If you’re carrying a credit card balance because you’re not able to pay your balance at all, your missed payments could negatively affect your payment history. And your credit score could be impacted if your card issuer reports your missed payments to one or all three major credit bureaus.
Is it better to carry a credit card balance or pay it off?
You may have heard that carrying a small balance will help your credit, but that’s a credit myth. According to the CFPB, it’s generally a good idea to pay off your credit card balance when you can, rather than carrying revolving debt.
If your card has an introductory 0% annual percentage rate (APR), 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 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 balance
Paying off your credit card balance can help improve your credit scores. There are also other benefits related to credit scores, personal finances and creditworthiness.
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 credit card. A balance transfer card could let you take advantage of a low introductory APR to pay off a high-balance 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 your 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 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.
Does your credit improve if you carry no balance?
If you pay off your credit card balance in full each month—meaning that you don’t carry a balance—your credit scores could improve. One major reason is that you’ll have a lower credit utilization ratio, which is an important factor in determining your credit score.
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 a low credit utilization ratio, which can help your credit scores.
To help monitor your credit, you could use CreditWise from Capital One. CreditWise is free for everyone, whether you’re a Capital One customer or not. And using CreditWise won’t hurt your score. CreditWise also allows you to access your TransUnion® VantageScore® 3.0 score and TransUnion report anytime. You can also get free copies of your TransUnion, Experian® and Equifax® credit reports at AnnualCreditReport.com.
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