High Credit Card Balance – How Can it Hurt Your Credit?
You pay all your bills on time and in full, don’t have any collection notices, bankruptcies or foreclosures on your record and you have a healthy credit history. So why is your credit score so low?
If you’ve ever faced a situation similar to the one outlined above, the reasons behind a low credit score can be a bit of a stumper. But a common culprit in situations such as this involves your credit card and how often you’re using it. Even if you pay off the balance of your credit card each month rather than just the minimum, your credit score can still take a hit – and it all involves what’s known as the credit card utilization ratio
Credit Card Utilization Rate
Simply put, your credit card utilization rate is how much you spend on your charge card each month reflective to its credit limit. For example, if you have a $5,000 credit limit on your card and charge $2,500 each month, you’re hitting a credit utilization ratio of 50 percent. Credit card utilization accounts for about 30 percent of your credit score, and, generally speaking, it’s advised that you attempt to keep your spending below 30 percent of your limit in order to receive the best possible credit score. The higher your credit card utilization ratio, usually the more it will impact your score in a negative way.
But what about if you pay off the balance monthly?
Even if you pay off your credit card monthly, your credit score may still reflect a high utilization ratio. That’s because it all depends on when in the billing cycle the credit card company is reporting your data to the credit reporting agencies. Usually, credit card companies report this data at the same time they print and send you your bill, so even if you’re paying off your card after receiving the bill, your score will still reflect a high utilization ratio.
With that being said, in order to keep your utilization ratio low and your credit score high, consider paying off your credit card bill prior to receiving the notice. In doing so, you can stay ahead of them at their own game, so they’ll be reporting zero balance to the credit reporting agencies, thereby ensuring you’ll have a better overall score. Know your billing cycle and either set up automatic payments or set calendar reminders to stay on track. In no time flat, you should be seeing your score elevate due to the decrease in your utilization rate when it really matters.