Most credit cards come with a preset credit limit. A card’s credit limit is the max outstanding balance you can have at any given time. You can pay down your balance and keep using your available over and over as long as you abide by the credit card issuer’s rules. That usually means making the minimum credit card payment each month on time and staying below your credit limit.
While your credit card issuer gives you permission to spend up to your credit limit, that’s not always the best idea.
More Expensive
Big credit card balances are more difficult to pay off. You can pay off your credit card balance over a period of time by making at least the minimum payment each month. But, when you carry a credit card balance, you pay monthly interest on that balance. The longer it takes you to pay off, the more interest you’ll pay. If you pay your balance in full each month, you’ll never pay any interest on your purchases.
Risk of Default
Carrying a large credit card balance can present a problem if you run into financial troubles. If you lose a job or become unable to work, you’ll have to scale back on expenses. Having a credit card balance gives you an extra bill to pay putting even more stress on your budget. You’re more at risk of defaulting when you have a high credit card balance.
Credit card default can hurt your credit score and make it harder to get approved for other credit cards and loans in the future.
Impact to Credit Score
High credit card balances can also affect your credit score. Part of the credit scoring calculation considers the amount of your credit limits being used. That ratio, known as your credit utilization, is best kept below 30%. On a credit card with a $1,000 limit, you should keep your balance below $300. Otherwise, if a high balance gets reported to the credit bureaus, your credit score may drop.
Ability to Get Other Loans
If you’re planning to apply for a mortgage or car loan any time soon, a big credit card balance can stand in the way. Lenders look at your debt-to-income ratio to decide whether you can handle another monthly payment. A high credit card balance can lead to a higher interest rate and monthly payment. In some cases, you may not be approved until you’ve paid off some of your credit card debt.
