When Do Credit Card Balances Impact Credit?

Credit card balances can negatively impact credit scores, and maintaining a higher FICO credit score involves keeping your balances in check and using credit cards responsibly. Smart credit habits open the door to finance opportunities, such as mortgage loans and lower premiums on insurances. Do your homework and understand how credit card balances can reduce credit scores.

Balances and Scoring

Credit scores range from 300 to 850, and several factors contribute to maintaining a high score. Some consumers are unaware of the relationship between credit card balances and credit scoring. When applying for mortgage loans, auto loans and other types of credit, lenders review credit reports and credit scores. The amount owed on existing debt at the time of applying for loans can lower scores and negatively impact approvals. Outstanding balances make up 30 percent of credit scores, according to Myfico.com. With this said, carrying high credit card balances is more likely to bring down your personal score.

Credit Card Utilization

You don't need a zero balance to improve your credit score or maintain a good credit score. However, you do want to keep your credit card balances to a minimum. Low balances signal a measure of control; and when seeking new credit, lenders and creditors will view you as less of a risk due to your good credit and debt management skills. Credit card balances should remain below 30 percent of your credit limit, according to MSN Money. For example, if given a credit limit of $3,000 on your credit card, your balance should not exceed $900.

Inactive Cards

Some consumers choose to avoid credit card use altogether to keep from accumulating debt and to maintain a good credit score. However, locking credit cards away and never using them doesn't help your score. In fact, this method can harm your score because credit card companies may stop reporting the account to the credit bureaus. Instead of avoiding credit cards, periodically use your cards for small purchases and then pay off the balance quickly to avoid high balances and interest charges.

Credit Card Warning

In order to increase credit card rewards points or airline mileage, some consumers use their credit cards for every purchase and then pay off their balances in full each month. While paying off high balances each month is responsible, this method can harm credit scores. Using the same card for purchases each month can result in a high balance always appearing on your credit report. Credit card companies update credit reports monthly, and they update your file with your current account balance. Regardless of whether you pay off your card each month, your report may always reflect a high balance. Rather than use the same card each month, rotate among two or three cards. Thus, your cards will reflect a zero balance for at least a month, which indicates that you're paying off your balances each month.