Simply explained, the balance on a credit card it is the total amount of money you owe at any given time, and this “debt” is reflected, of course, in the credit card account. Your balance changes based on your account activity: When you make a purchase, your balance increases. When you make a payment, it decreases.
However, purchases are not the only factor that has an effect on the balance. Charges incurred during the billing cycle, such as cash advances, balance transfers, interest charges, as well as any fees (annual fees or late fees, for example), can increase the total amount of your debt.
If you can’t pay your account in full and on time each month, the remaining balance is carried over to the next billing cycle. In this case, interest charges accrue for the amount of the balance that you have not paid.
But carrying a balance on a credit card means more than that, so read on to learn what impact it can have on your financial health.
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- 1 What exactly does it mean to carry a balance on a credit card?
- 2 What is a good balance on a credit card?
- 3 What is the difference between minimum payment, statement, and balance on a credit card?
- 4 Why is it important to keep track of my credit card balance?
- 5 special considerations
- 6 In summary
What exactly does it mean to carry a balance on a credit card?
As we’ve explained, if you don’t pay your credit card bill on time and in full each month, whatever remains (the unpaid balance) rolls over to the next billing cycle. If you have a balance, you will most likely be charged interest on it.
What is a good balance on a credit card?
In general, it’s not a good idea to carry a balance on a credit card. But life happens and sometimes it is not possible to pay all the bills on time, is it? If you find yourself in this situation, pay attention to how much you are spending compared to your credit limit.
If you’ve reached or are approaching your credit limit, one of the following tactics may help you reduce the impact on your credit scores. The key here is to lower your credit utilization ratio.
- Ask your card company to increase your credit limit (just remember this could result in a hard credit inquiry);
- Each month, make more than one payment on your credit card account instead of waiting and paying a lump sum. This can be of great help so that the balance does not become too high.
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What is the difference between minimum payment, statement, and balance on a credit card?
Although your credit card balance is the total debt on your account, you may see other numbers on the statement you receive each month, such as:
- Minimum payment. This is the minimum amount of money you have to pay your credit card company before the due date to avoid being charged late fees.
- Account status. Composed of all the charges that appear on your credit card at the end of the billing cycle, any balance you carry will appear here as well as the accumulated interest. It doesn’t include things like additional purchases, cash advances, or balance transfers added to your balance after that billing cycle has passed.
To get the most up-to-date account information, you can log in to your account online or call your card issuing company.
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Why is it important to keep track of my credit card balance?
Pay attention to the balance on your credit card credit can be of great help to keep your finances in order and improve your credit health. Here we explain why.
- It can help you control your expenses. When you make purchases with a credit card, it’s easy to forget how much you’ve spent and what you’ve spent it on. Keeping track of your balance can help you stay within your budget.
- It can help you avoid interest charges. Controlling your purchases can help you keep your spending under control so you won’t have a problem paying your bill in full and on time, which, at the same time, will prevent you from accruing interest.
- It can help you keep your credit utilization low. If you frequently go over the maximum limit on your credit cards or get too close, your utilization rate credit, which refers to how much of your available credit you’ve used, can be high. Along these lines, tracking your spending can help you stay below your credit limit and have low utilization, which in turn has a positive effect on your credit.
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Pay your credit card balance
A zero balance on a credit card is the best approach to effective credit management. A zero balance also helps avoid the high interest rates associated with a positive balance.
Now, in the case of having a balance, it is best to make the minimum monthly payment plus an additional amount. Because this way you will not only pay off the debt faster, but you will also have less interest.
However, sometimes it is not that simple. You may find yourself in a situation where you can only make the minimum payment. In this case, it will take some time to pay off the balance on your card, but you will keep your credit score under control.
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Credit card balances and credit scores
As we’ve mentioned, carrying a balance on your credit card is generally not a good idea. Why? well because it can affect your credit score. Carrying such a balance has an effect on the calculation of your credit utilization, which comprises 30% of your score. In this order of ideas, your utilization percentage should ideally be 20% or less of the total available credit.
Let’s take an example. If you have a credit limit of $5,000 and you carry a balance of $4,000, then your credit utilization is 80%, which is extremely high. This tells creditors and lenders that you are not responsible with your credit and that you are likely to default on a future loan or the same credit card. In the same way, low credit utilization shows creditors and lenders that you are capable of handling credit responsibly.
Important: As we have already explained before, talk to your credit card company to increase the limit of the card, since this will decrease your credit utilization.
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“Credit cards can be a powerful tool for building or rebuilding credit, but you need to make sure you use them wisely,” he says. Ash Exanthus, director of financial education at BankMobile.
Because carrying a balance can have a negative impact on your credit health, and those interest payments can add up, it’s always best to pay off any balance on a credit card as soon as possible.
To avoid running up a balance in the first place, Exantus advises consumers not to use credit cards for anything they can’t pay for with cash.