A common myth in the finance world is that a considerable credit card balance can help you build your credit score. That's simply not true. A credit balance, on the contrary, can harm your credit score. Although not as significant as the disadvantages, credit card balance does have its share of benefits as well. We shall discuss both these facets of credit balance below.
To start off with the more substantial aspect of the matter, let me first tell you why carrying a credit balance can be a menace.
If your credit card limit maxes out, your credit score takes a hit. Your credit utilization ratio immediately shoots up. You should ideally spend only up to 30% of your total credit limit. Keeping a low credit balance is better for your overall credit health.
Users often confuse "showing creditors that you're using credit" with "having a balance." Let me make it easier for you to understand. If you use your credit card regularly, responsibly, and make payments on time, lenders will know that you are a responsible borrower. On the other hand, if your credit card expenses are too high, lenders will perceive you as a risk. Hence, a high credit card balance doesn't necessarily make you a better borrower in the eyes of the lenders.
It is important to keep a card active, but that doesn't necessarily mean that you have to use it extensively. Use your credit card to pay a small monthly subscription. Set up autopay for your internet or cable connection. Set up your savings accounts to pay your credit card bills in full within the due date, automating the whole process. If your credit card remains inactive for a long period, the creditor might close the account. This will reduce the average age of your credit history, and that can affect your credit score.
Have you ever noticed that your credit card minimum payment is dependant on your expenditure? The minimum due is a certain percentage of your total credit balance, which fluctuates every month. Though it is advised that you pay off the entire balance every month, yet an occasional financial crunch might not allow you to do that, and you might have to pay only the minimum balance at times. Remember, if your expenses are high, the minimum balance will also shoot up.
If you borrow more money than you can afford to repay, you will inevitably get into debt. If you have a high credit card balance, you will have a natural propensity to fail timely payments. With a penalty APR added to your total borrowings, you will find it extremely difficult to repay the money that you owe. If you do manage to pay on time, you will most likely pay just the minimum amount, and the remaining sum of money will attract a high APR. Either way, you will unnecessarily end up paying a lot more than you had borrowed. All these situations indicate a gradual progress towards deep debt.
Quite a few services compulsorily require that you have a credit card. Car rentals, hotel bookings, and other 'book-now-pay-later' bookings are generally made through credit cards. During such transactions, your credit card issuer will block a portion of your credit limit so that the required amount of money is available when you need to make the actual payment. A high credit balance in your card will render you ineligible to make such bookings.
If you use your credit card to spend a lot, you will earn a lot of credit card points. Each card issuing company has their own reward point system. You can redeem these points later to buy electronics, items for household or personal use, flight tickets, certain services, shopping vouchers, etc. as offered by the concerned institution.
If you have a high credit balance, but at the same time repay the balance in full regularly, you might earn the trust of potential lenders and improve your creditworthiness.
It has now been made evident to you that a high credit balance has more disadvantages than advantages. Reward points from high credit balance could be useful, but it's not worth risking your credit history.
Hence, make your financial decisions very cautiously and keep yourself safe from the dangers of a high credit card balance. Also, check your credit score regularly to see to it that credit balance is not wreaking havoc on your credit health.