The Trouble with High Credit Card BalancesBy David Thompson, UniversityHerald Reporter
Your credit card's limit isn't a boundary that you want to hit. In fact, it's a boundary that you want to give a wide berth to. Why? The higher your credit card balance is, the more problems you'll likely encounter. These are some of the problems you might face.
You'll Have a Limited Amount of Available Credit
One problem with having a high credit balance is that it limits the amount of credit that you have available. This limited amount of credit could stop you from using your card for important purchases in the near future. You'll have to find another way to make the purchase-or worse, you'll have to refrain from the purchase altogether.
This may not seem like that big of a problem when you consider purchasing non-essential expenses. But what about emergency expenses? Your credit card is a convenient resource to have when you're contending with an emergency expense. If you don't have enough savings to handle the expense, you can charge it to your card and then work to pay down the balance later on through your monthly billing cycle.
If your current balance is already high and close to the limit, you might not be able to use that credit card when disaster strikes. It won't be much of a safety net. You'll have to consider an alternative payment method to cover the emergency. In that case, you could go to a website like CreditFresh to see whether you're eligible to apply for an online loan. If you are, you can submit your loan application quickly - it could take you less than ten minutes to finish.
An approved loan could let you temporarily borrow enough funds to pay off your emergency expense and move forward. Afterward, you could repay the loan through a monthly billing cycle.
You'll Have a Harder Time with Payments
The higher your credit card balance is, the more challenging it will be to tackle. Unless you're making a substantial income, it will be difficult to pay the entire balance down when your monthly bill comes in. You might only be capable of paying down a small portion of it, which means the remainder will accrue interest over the next month. Considering how the average credit card interest rate is very high right now, that interest can have a dramatic influence on your balance in the upcoming months.
You might be capable of only paying down the minimum. But even your minimum payments are impacted by your higher credit card balance! If your credit card calculates its minimum payment with a flat percentage rate, your payment will grow bigger whenever your balance rises.
Making minimum payments is not a good debt repayment strategy when you have a high credit balance anyway. The minimum payments will only prevent you from being charged a late penalty by your creditor. It won't do much to trim down the balance and it won't be enough to counter the effects of interest.
You'll Be More Likely to Max Out Your Account
When you have a high credit card balance, you have a higher risk of maxing out your credit card. Maxing out your credit card is when you reach the credit limit, using all of the credit available to you. Once you've reached this limit, you won't be able to make any additional transactions with your card - at least until the balance has been brought below that limit once again. Your balance will still be charged interest.
In addition to paying down your balance, you may have to pay a credit limit fee for maxing out the account. Your creditor might also increase your card's interest rate to penalize you for making this financial mistake and to pressure you to take repayments more seriously.
Your Credit Score Could Drop
Finally, your high credit card balance can lower your consumer credit score. Using up too much of your available credit will give you a steep credit utilization ratio - this is a key factor in calculating your credit score. If your max out your card, your score could drop even lower.
These are some of the disadvantages that can come with a low credit score:
Higher interest rates
Higher insurance premiums
Higher security deposits
Lower credit limits
Lower chances for loan approvals
Your high credit card balances aren't worth all of the risks they bring. It's time to whittle down those balances and free up space on your cards.