Can carrying over your balance affect your credit score badly?

Published on November 26th, 2020
  Written by 
Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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You will be surprised to find how easy it is to reach your credit limit with a single purchase. The general rule is to use no more than 30% of the credit that is available to you. However, not checking your statements along with your credit report can land you in hot water whereby you make one purchase that force you to carry over your credit cards balance. This can have a negative effect on your credit score. Here are five ways carrying over your balance can affect your credit score.

Having a high balance is expensive

Pushing your credit card to its limit can have a negative effect on you financially. Credit cards come with an interest rate which determines how much you pay in monthly repayments. When you carry this amount over it will be combined with the amount you already owed for the previous month. The numbers can continue to roll up until you are no longer able to meet the monthly repayments. This is why you have to stick to your credit limit and pay off your credit card in full each month.

Carrying over a balance will hurt your credit score

Your credit score is something lenders will look at to evaluate whether they can loan you any amount of money that you apply for. This also applies to credit card applications. If you have a credit card that is maxed out, which means that your balance is teetering at the credit limit, it can cause your credit score to drop by 10 – 45 points on your FICO damage points. This will affect your future lending, so it is important that you never exceed your credit limit by keeping a watchful eye on how you spend with your credit card.

Your minimum payments can increase

If you have been paying attention to your minimum repayments, you will realise that it moves according to the balance you have on your credit card at the end of each month. Your minimum repayments are usually calculated as a percentage of your credit card balance which can be between 2% – 3%. By carrying over your balance this will increase your minimum repayments. This can be a tight squeeze for people who rely on the minimum repayments to meet their monthly repayments. It is advisable to pay off more than the minimum repayment in order to manage and pay off your credit card balance. However, if you find yourself nearing your credit limit you will have to re-evaluate how you use your card when it comes to spending.

You overuse your credit card

If you own one credit card and overuse for an extensive range of charges you need to keep in mind that this will reflect on your credit history in a negative light. This is more so if you have only have had the credit card for a short period of time. Spacing out the usage of your card for important purchases can ensure that you meet your monthly repayments instead of feeling squeezed for every cent you own. Having multiple cards to spread your expenses is also another option you can consider if you are good at managing various accounts.

How you can be card conscious

Ditching your credit card altogether can be an unreasonable request but knowing how to better utilise it in a way that doesn’t hurt your credit score and financially is the first step to becoming credit card conscious. You don’t have to constantly swipe your card to show activity on your credit report. There are healthier ways to use your credit card such as:

  • Meet monthly repayments – Restrict your card to make important purchases and ensure that you do not exceed your credit limit. That way you will be able to maintain a balance that you will be able to pay in full every month.
  • Spread the amount across multiple cards –  Instead of having one credit card you can take out multiple cards that will lower the usage and monthly repayments on your card. This will also lower your credit card utilization ration, which will help you when you need to borrow money in future.
  • Only spend what you can afford – This will require discipline on your end in the form of setting a budget and limiting the card for specialised purchases instead of impulse buying. A general rule of thumb is to never make purchases that exceed your income.

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