How carrying a balance can affect your credit

There are many reasons you might not pay off your credit card bill in full. Maybe there’s a large expense you need to pay off over time. Or maybe your credit card has a promotional annual percentage rate (APR) offer and purchases aren’t accruing interest yet. 

Wondering if carrying a balance impacts your credit scores? Read on to take a deeper dive into the relationship between credit card balances and credit scores

Key takeaways

  • Carrying a balance on a credit card means not paying off the credit card bill in full before the due date.

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

  • Not keeping up with minimum payments could impact your credit scores if the lender reports it to the credit bureaus.

  • Paying off your credit card each month can help you avoid interest charges and maintain a lower credit utilization ratio.

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How does carrying a balance on your credit card work?

When you carry a balance on your credit card, it means you paid off a portion of your balance for that billing cycle and carried the rest over to the next cycle. It’s a good idea to make at least the minimum payment each month to remain in good standing with the credit card issuer.

Your credit card may have a grace period, which is the time between when your billing cycle ends and the payment is due. If your credit card has a grace period and you pay the statement balance in full every month, you won’t pay interest on your purchases. But if you carry a balance, your purchases could quickly start to accrue interest charges.

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 a revolving credit account. For example, if you have a $1,000 balance on a credit card with a $4,000 credit limit, its utilization rate is 25%.

According to the Consumer Financial Protection Bureau, experts recommend keeping your credit utilization below 30% of your total available credit.

If a high utilization rate is hurting your scores, you may see your scores increase once a lower balance or higher credit limit is reported.

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 bill is due. As a result, you could make credit card payments in full every month and still see the previous balance and utilization rate.

If you aren’t able to pay your balance at all, your credit card issuer will likely report the missed payment to one or all of the three major credit bureaus.

Should you leave a small balance on your credit card?

If 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, you can consider paying off your balance over time because it’s not accruing interest. Just be aware that carrying that balance could still impact your credit utilization ratio—and ultimately your credit scores. Plus, once the intro 0% APR offer ends, the standard APR kicks in. And that’s when interest starts to accrue.

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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 to 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 in general. 

  • Avoid interest. Paying your card in full each month by the due date can help you avoid paying interest on purchases. If you are struggling to make payments on time or have accrued interest, you could consider a balance transfer. A balance transfer card lets you pay off the balance of a high interest rate card and take advantage of a low introductory APR.

  • Maintain a low utilization rate. It may be easier to maintain a low utilization rate if you don’t carry a balance, accrue interest or let your balance grow during your statement period. 

  • Lower your debt-to-income (DTI) ratio. In addition to credit scores, lenders will often consider your DTI ratio—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.

  • Show a positive trend in your payment history. Credit-scoring companies FICO® and VantageScore® both consider payment history to be an important factor in your credit scores. Having a history of paying your bill in full every month—even if you had a high reported balance—may be good for your creditworthiness.

Carrying a credit card balance in a nutshell

Paying off credit card balances in full every month could help you avoid paying interest. And it could lead to a lower credit utilization rate that can help your credit scores. But if you need to carry a balance, just remember to make at least the minimum payment on time to keep your account in good standing.

To keep an eye on your credit, you could monitor your credit utilization and credit scores with CreditWise from Capital One. It’s free for everyone, even if you’re not a Capital One customer, and it won’t hurt your score.

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