How High Credit Card Balances Hurt Your Credit Score

Submitted by Rachel on Thu, 10/25/2018 - 08:41

Credit card utilization
What high credit utilization can do to your credit score
Image by Sharon McCutcheon via Unsplash


Your credit score is a three-digit numerical passport to opportunities and the things you may want in life. From a home to a car and even your dream job, like it or not, your credit score matters. Knowing the importance of your credit score is just the first step. You must also understand how your credit score is calculated and what behaviors will boost your score. One critical factor is how you manage your credit cards. Here’s a look at how high credit card balances drag down your credit score.

High balances = High credit utilization = Lower credit score

Your credit utilization is how much of your available credit lines that you’re using and is expressed as a percentage. If your total credit card lines of credit equal $10,000 and you owe $4,000 on your cards, you take 4000/10000 to calculate a 40% utilization. That is extremely high. You should never go over 20-25% of your credit line if you can avoid it.

When you charge expenses to your credit card, the amount you owe on the card gets reported to the three major credit bureaus – Equifax, Experian, and Trans Union – by your card issuers. This data is reflected on your credit report and will be used in calculating your credit score.

Why High Utilization Turns Off Creditors

The purpose of a credit score is to evaluate whether you’re worth the risk. To best assess, there’s an algorithm applied to your credit report which is a log of all your credit decisions and behaviors. When you routinely max out your cards – charging up to the credit limit – your credit utilization will be very high, and it could indicate that you’re not making good choices.

If you run up your credit cards now and then – like when you have a major car repair or must replace an appliance – that’s not such a big deal. But if you routinely max your credit lines, it’s a red flag. Even worse, if you run up your credit cards over 30% and then don’t pay down the balances and your utilization creeps upwards, it’s a sign you might be in a spending or debt spiral.

The higher your utilization and the longer it stays that way, the lower your score will drop. Not only will your score drop but it can mean you might not be approved for new credit, a real estate rental, or a job that you want. Credit risk decisions, for lenders, are all about a pattern of behavior. If you behave inconsistently or seem to be overspending, it can make you look risky.

How to Control Credit Utilization

The best bet for keeping your credit utilization down, as experts suggest, is to make sure you do not overspend. Credit cards are a double-edged sword. If you don’t use your cards at all, card issuers won’t give you credit limit increases and will eventually cancel your plastic. Ideally, you should use your cards some, but not overuse.

#1 Use cards for recurring affordable payments

Setting some recurring bills to pay on your credit card is a smart way to get usage without over-utilization. Put your Netflix on one card and your cell bill on another, for example, then pay the balances off in full at the end of the month

#2 Set up an emergency reserve

One reason people max their cards is an unexpected expense. Try and save up a few thousand dollars in an emergency savings account so that if you need a big car repair, must replace an appliance, or have another large cost, you can cover it without maxing your plastic.

#3 Ask for credit line increases

Another way to keep your utilization low is to ask for credit line increases occasionally. By having larger credit lines that you don’t use you’ll have a buffer against exceeding recommended utilization. Some sites have a button you can press to ask for a higher credit line and others you must call. Wait until your balance is zero and be sure you’ve made timely payments before you ask for a rise.

To find out more about improving your credit score, check out Credit Score Keys.