When you open a new line of credit, the issuer sets a spending limit for that credit card. Anything you charge on the credit card adds to your total balance. If you do not pay the balance in full by the due date each month, the bank will add interest on the unpaid amount to your balance. The lender also adds fees to your balance when you make late payments or when your balance goes over your credit limit and the bank covers the payment (over-limit fees), annual fees, and maintenance charges.
Credit cards have become almost a necessity in modern day life. They make day-to-day living more convenient, help with emergencies, and show other lenders, like mortgage bankers, your ability to repay a debt. However, with credit cards comes a balance, which may hurt your credit score.
What Is a Balance?
Credit Card Balances and Credit Scores
The balance on your credit cards has a direct effect on your credit score. According to Fair Isaac, the company that invented the FICO or credit score, the balance your carry makes up 30 percent of your total score. This percentage includes the balance on every credit card you have, as well as any installment loans such as mortgage payments or car loans.
A High Balance
The higher total balance you carry on your credit card, the lower your overall credit score will be. Your credit score is at its lowest when you have maxed out your credit card, or spent up to the available limit. Even if you have not reached the credit limit, carrying a high balance still has a negative effect on your credit score. CNN Money conducted an interview with credit expert Rex Johnson. According to Johnson, you lose one point from your overall FICO score for every percent of your credit limit you spend.
A Low Balance
Carrying no balance, or a balance much smaller then your actual available credit limit, can improve your credit score. According to CNN Money, your balance should be less then 30 percent of your credit limit. This total includes interest from previous balances and any fees associated with the credit card.
Using Your Balance to Improve Your Credit Score
You can use your current credit card balance to raise your credit score. If you have a balance higher then 30 percent of your total available limit, paying the balance down, on time, every month will give you positive ratings in both the payment history and amounts owed factors in your credit score.
- Photo Credit patriot credit card image by Ray Kasprzak from Fotolia.com
Does Paying the Minimum Hurt Your Credit Score?
Paying the minimum amount you owe on your credit cards can hurt your credit score if you carry ... Does Paying a...