How Carrying a Balance Affects Your Credit Score

Blog posted On April 28, 2021

You carry a credit card balance when you don’t pay your total bill on time and in full each month. Whatever’s left unpaid gets carried over to the next month’s bill. For example, if you bought a $1,000 TV and paid off $700, you carried over a balance of $300. For the most part, credit card users are encouraged to pay their bills on time and in full. So, is carrying a balance ever a good idea? 

What does it mean to carry a credit card balance?

Every month, you have a credit card bill. On your credit card bill you will see different charges and fees. The majority of your charges will be purchase balances and previous balances. A purchase balance (current balance) is anything that you’ve charged to your credit card over the past month. A previous balance includes and credit card charges that were left over (unpaid) from two months before.  You will also have to pay interest on previous balances. That $300 left over from your TV purchase just got more expensive.  

Carrying a balance and credit utilization 

In some cases, carrying a balance could help boost your credit score. However, it largely depends on your credit utilization ratio. Your credit utilization ratio is the total revolving credit you’re using divide by the total revolving credit you have available. Revolving credit includes monthly debt like credit card statements and nonrevolving credit includes longer term debt like student loans and auto loans. 

If you had a credit card with an available balance of $5,000 and you spent $2,500, your credit utilization would be 50%. Credit experts recommend keeping your credit utilization below 30% to demonstrate good debt management and help keep your credit score high. If you’re trying to improve your credit score, some experts suggest limiting your credit utilization to below 10%. The lower the credit utilization, the better. But if you’re trying to carry over a balance, you would want it to be greater than 0%. 

Benefits of carrying a balance

Some people choose to carry a small credit balance at all times (1% to 9%). Though having a clear account might feel good, it doesn’t give credit score companies much to work with.  If your accounts are always at zero, it might look like you’re not using the credit you’ve been given. Therefore, it wouldn’t necessarily show that you can handle debt well. 

Keeping a small balance on your account shows that you can use your credit responsibly. It gives the credit card scoring model something to assess. By keeping a small balance on your credit card, you give the models something to evaluate, which can result credit score improvement. “The scoring elves have found that cards reporting no balance have a slightly higher risk factor than a card carrying a very small balance,” wrote Steve Bucci, credit and debt expert contributor for Bankrate. However, it is important to make sure that you keep your balance small. 

Risks of carrying a balance  

If you end up carrying too much over, then your credit score could be negatively affected. Carrying over a $500 balance on a card with a $1,000 would mean a 50% credit utilization rate, which would not show good credit card practices and would likely hurt your score. In general, strive to keep your credit utilization ratio below 30%. If you’re trying to carry a balance for purposes of improving your credit score, shoot for below 10%

Probably the biggest concern people have about carrying over balances is interest charges. When you carry over balances, you will be required to pay interest on the money left over. Unlike mortgages, credit cards have much higher interest rates – typically between 15% and 24%. If you have a previous balance of $500 and an interest rate of 20%, then your actual cost would be $600. So, make sure that you keep your balance low enough that you won’t be paying hundreds of dollars in interest. Another option could be searching for a credit card that has low or no introductory interest rates. Then you can carry a balance without incurring interest charges for a set period of time.

The last concern about carrying over a balance is the financial risk. Carrying a balance can be helpful to your credit score as long as you’re in a financially stable place. If you were to lose your job or end up in a position with reduced income, you wouldn’t want that extra balance to worry about. 

Carrying over a small balance from month to month could help improve your credit score, if you manage it well. By having a small balance on your card month-to-month, you’re showing the credit scoring companies that you can use credit well and manage debt efficiently. But if you’re looking to improve your score, make sure you keep your credit utilization ratio as low as possible. Keeping your balance low will also reduce interest charges. 

Sources: Bankrate, US News, Value Penguin