Carrying a credit card balance: Credit impact and cost

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, such as needing to cover unexpected repairs or medical bills or making an unusually large purchase. But whatever the circumstance, it’s helpful to understand how carrying a balance might affect credit scores and interest charges.

What you’ll learn:

• Carrying a balance on a credit card may hurt your credit scores based on how it impacts your credit utilization ratio and payment history.

• If you carry a credit card balance, the card issuer may charge interest on what’s left over and on any new purchases.

• Paying off your credit card each month can help you avoid interest charges, maintain a lower credit utilization ratio and improve your debt-to-income (DTI) ratio.

Yes, carrying a credit card balance can affect two key factors that influence your credit scores:

One major impact of carrying a balance is that it can raise 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—including your credit cards. If you start carrying a balance for the first time or increase the balance you’ve been carrying, your credit utilization ratio will go up.

According to the Consumer Financial Protection Bureau (CFPB), experts recommend that borrowers keep credit utilization below 30% of their 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 to the credit bureaus 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 ratio on your credit report that are different from what you expect.

Payment history is another major factor in calculating your credit scores. 

If you’re carrying a credit card balance because you’re not able to make a payment at all, your missed payments could negatively affect your payment history. And your credit scores could be impacted if your card issuer reports your missed payments to one or all three major credit bureaus.

If you carry a balance on your credit card, you will pay interest based on your card’s annual percentage rate (APR). The credit card issuer calculates interest daily on your average daily balance. 

For example, say a cardholder has an APR of 22% and carries a $1,000 balance for 30 days. The daily interest rate is 0.22 ÷ 365 = 0.0006 (APR divided by the number of days in a year).

Multiply this by the card balance and by the number of days the balance is carried:
$1,000 × 0.0006 × 30 = $18.

So the interest is around $18 for that month if the balance isn’t paid in full.

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 in full when you can rather than carry revolving debt.

There are several benefits of paying off credit card debt related to credit scores, personal finances and creditworthiness. Here are some reasons to avoid carrying a balance:

• 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.

• 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 lower credit utilization ratio.

• It can lower your 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.

The only way to avoid carrying a balance on a credit card is to pay off the card in full every month. 

If you’re carrying a high balance and interest charges, it may help to consider ways to pay off credit card debt. Eliminating your balance can help you avoid further interest charges and improve your credit scores.

If you’re currently carrying a balance on your credit card or think you may need to carry a balance in the future, here are some options you can consider:

• Consider a card with a 0% introductory rate. If you think you may need to carry a credit card balance, a card with an introductory 0% APR could give you more time to pay down your balance without accruing interest. Just remember that carrying that balance could still impact your credit scores. Plus, once the introductory rate ends, the standard APR kicks in. And that’s when interest starts to accrue.

• Explore debt consolidation methods. If you’re struggling to make payments on time or have multiple balances, you could consider consolidating credit card debt. For example, moving debt to a balance transfer credit card or debt consolidation loan with a lower interest rate could help you streamline payments and take advantage of a lower interest rate to pay off a high-balance card.

Here are answers to some common questions about carrying a balance on a credit card:

Paying off your credit card in full every month before the due date instead of carrying a balance could help you avoid interest charges. It could also help you manage a lower credit utilization ratio, which can help your credit scores.

To help monitor your credit, you could use CreditWise from Capital One. CreditWise lets you access your credit report and credit score anytime, and using it won’t hurt your credit scores. CreditWise is free, even if you’re not a Capital One account holder. You can also get free copies of your TransUnion®, Experian® and Equifax® credit reports at AnnualCreditReport.com.

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