Carrying a balance on your credit card can result in a triple whammy of costs — dinging your budget, credit card grace period and credit score.
Yet 57 percent of credit card users have carried a balance before, based on a recent CreditCards.com survey of 1,000 adults in the U.S.
Even worse, more than 1 in 5 of these consumers — 22 percent — believed carrying a balance over from one month to the next would help their credit score.
Unfortunately, that’s not true.
Overall, the most common reasons these consumers cited for carrying a balance were lacking the money to pay a bill in full and wanting to either free up cash or spread out payments. Here’s how carrying such a balance hurts your score:
Credit card purchases generally do not start incurring interest immediately. This is because most credit cards offer a grace period for purchases — that is, a period of time between the end of the billing cycle and the payment due date — according to the U.S. Consumer Financial Protection Bureau (CFPB).
If your credit card offers you a grace period and you pay your balance in full by the due date, you will not incur interest charges. If you carry a balance past the due date, however, the credit card company will charge you interest on whatever amount of your balance you did not pay off by the due date.
The only exception to this would be if you are using a credit card with a zero percent interest rate. They do exist, and you can find them using a free online resource like Money Talks News’ credit card search tool — select “0% APR” from the menu on the left.
2. Your credit card grace period
It’s possible to lose your credit card grace period if you do not pay your balance in full by the due date — in other words, if you carry a balance.
Losing your grace period will in turn cost you even more interest on future purchases and balances. The CFPB explains:
“If you lose your grace period by not paying your balance in full by the due date, you will be charged interest on the unpaid portion of the balance. You will also be charged interest on purchases in the new billing cycle starting on the date each purchase is made.”
3. Your credit score
This includes your credit utilization ratio: the percentage of all the credit available to you that you are using at a given time.
For example, if you have a total credit card limit of $4,000 and currently owe $2,000 on your credit cards, your credit utilization ratio is 50 percent.
A high credit utilization ratio hurts your credit score, while a low ratio helps your credit score. So, carrying a large balance over from one month to another can hurt your credit score by inflating your utilization ratio.
VantageScore Solutions, the company behind the VantageScore credit score, advises keeping your utilization ratio at or below 30 percent. But it also notes that the folks with the highest credit scores generally have utilization ratios of less than 10 percent.
Did you know that carrying a credit card balance can hurt you in all of these ways? Share your thoughts below or on Facebook.