Having a good credit score is a fundamental factor if you are looking to get a mortgage loan, or wants to start your own business or apply any other kind of loan. If you do have some accumulated debts, your credit score will not probably be as healthy as you think. Although, there might be some other alternatives for people with a bad credit score, such as applying for a guarantor loan. But, what does it means to have a balance, and what are those factors that can affect your credit score?

What does it means to carry a balance?

Many people think that carrying a balance is beneficial for their credit score because card issuers will earn a larger amount of money from the interest of payments. But this does not necessarily affect your credit score as much as your payment history or your credit usage. 

The total amount of debt that you are carrying it is a very important factor, just right after payment history, so your credit card balance might impact your credit score. If your balance is too high, your credit score may be negatively affected. This is mostly due to credit utilization, which measures the total quantity of available credit that you are using.

Carrying a balance will negatively affect your credit score if:

• If you have so much debt on your card, or you are late on a payment.
• If you do not pay in full your credit card bills, you will be carrying a balance, which won’t be beneficial for your credit score.
• If you do not pay in full your bill, your balance will grow.
• Late payments will be kept on your records for up to 7 years, meaning that it can seriously damage your finances.
• You are using a credit card to accumulate rewards. For example, the use of travel cards or shopping cards: consumers tend to overspend their money, as they start carrying a balance.

Keeping your expenses ratios low

Carrying a balance on your credit cards harms your credit score, as it increases your credit utilization ratio, which is the total amount of your available credit that you are using. Furthermore, it is known that the best option for your credit score is to keep its utilization rate under 30%, as this is a safe number to keep rates low. Those retirees that are thinking of new ways to make the most of their retiree accounts must watch out their expenses ratios, but they will always have access to affordable borrowing options.

Here I share some tips on how to keep your expenses ratios low:

1. Keep checking on your balance. You can receive alerts via email or texts, so you will know exactly when to stop using a card and to stop accumulating debt.
2. Split your payments. This way you will always keep your balance low.
3. Having multiple cards. Be aware of the fact that having more than one credit card can make your debt rise.
4. Avoid closing old accounts. The length of your credit history is based upon an average of all your credit card accounts. Therefore, it is best to keep your accounts open the longest you can (if they do not require to pay high fees).
5. Make credit card payments for small purchases. Use your credit card for those payments that you know for sure that you can pay them straight away.
6. Keep expenses ratios below 20%.  The less percentage of utilization you keep, the less debt you will have.

Why carrying a balance is not good for your credit score? 

On the other hand, people believe that having a credit card balance of zero will make them look good in front of the reporting bureaus. However, having a zero balance does not necessarily mean that you can afford all your payments on time. It does not matter how much have you paid off, as credit bureaus will have access to your initial balance. To show them that you make a responsible use and a good utilization, you do not need to carry a balance, as the purchases that you make will mark your utilization, even if you have paid them off at the end of the month.

Julia Brookes

Finance Consultant at NowLoans

https://www.nowloans.co.uk