Paying off credit card balances in full each month is one of the best ways to build and maintain a good credit score. However, many cardholders wonder if not paying their balance in full will hurt their credit. The short answer is – it can. Here’s an in-depth look at how paying less than your full balance can impact your credit score and what you can do to mitigate any negative effects.
How Credit Card Issuers Report Payment Information
Your credit card company tells the three main credit bureaus—Equifax, Experian, and TransUnion—about your payment when you make one. They tell you if you paid the full amount or just the minimum amount.
If you don’t pay your balance in full, the remaining balance will appear on your credit report. Over time, constantly carrying a balance can negatively impact your credit utilization rate and ultimately your credit score.
Why Paying In Full Is Ideal
Paying off your credit card balance in full every month shows that you know how to use a credit card responsibly. It shows lenders that you know how to handle your credit lines well and won’t put yourself in too much financial danger.
On the other hand, having a balance from month to month can mean that you might have trouble making payments in the future. This is why paying off all of your debts at once is the best way to improve your credit score.
How Not Paying In Full Impacts Your Credit Score
There are five main factors that make up your FICO credit score:
- Payment history
- Credit utilization
- Length of credit history
- New credit
- Credit mix
Credit utilization is the second most important factor, making up 30% of your total score. How much of your available credit you are using at any given time is called credit utilization.
When you don’t pay your full balance every month, your credit utilization rate increases. The higher your utilization rate, the more it can damage your credit score.
As a general rule try to keep your utilization below 30%. The lower the better. Maxing out cards or having high utilization across multiple cards is especially harmful.
Additional Drawbacks Of Carrying A Balance
Aside from the credit score impact, carrying a balance month-to-month also means paying interest charges. Most credit cards have high interest rates ranging from 15-25% APR.
For example, if you have a $1,000 balance on a card with a 20% APR and you only pay the minimum, you could owe over $200 in interest charges over the course of a year. Those interest fees can quickly negate any rewards you may have earned.
Strategies To Mitigate Damage
If you can’t pay your balance in full one month, there are some strategies you can use to reduce the credit score impact:
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Pay more than the minimum – Paying even $20 or $50 above the minimum can help lower your utilization rate. This signals responsible usage.
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Pay down balances before the statement cuts – Make payments before your statement closing date to lower the balance reported to the bureaus.
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Ask for a credit line increase – A higher limit means a lower utilization rate. Just don’t use the increased limit to overspend.
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Use low limit cards lightly – Limit usage on cards with small limits, as these impact utilization more significantly.
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Spread balances across cards – Avoid maxing out one card. Distribute balances across multiple cards to lessen the impact on any individual card’s utilization rate.
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Ask for goodwill removal – If a high balance was reported, ask the issuer to remove it as a “goodwill adjustment.” They may comply to help improve your credit standing.
When Paying In Full Isn’t Feasible
For some people, paying credit card balances in full every month simply isn’t feasible. If money is tight, focus on paying at least the minimum by the due date to avoid late fees and credit damage. As soon as you are able, start paying more than the minimum to pay down the debt faster.
Avoid relying on credit cards until you pay down balances and are able to pay in full monthly. Seek out lower interest rate options like balance transfer or personal loans to reduce interest fees in the interim.
The Takeaway
Not paying your credit card balance in full can negatively impact your credit score over time. High revolving utilization signals credit risk to potential lenders.
To maximize your score, always try to pay your balance in full and on time each month. If that’s not possible, use mitigation strategies to lessen the damage until you can pay down the debt. Monitoring your credit and maintaining healthy usage habits are vital for credit health.
When will my credit scores improve after paying off my debts?
Paying off debt is more likely to help your credit scores than to hurt them. You are likely to see your credit scores improve after paying off debt unless the debt you repaid meets the unique criteria listed above.
Why might my credit scores drop after paying off debts?
Paying off debt might lower your credit scores if removing the debt affects certain factors such as your credit mix, the length of your credit history or your credit utilization ratio.
For example, paying off your only installment loan, such as an auto loan or mortgage, could negatively impact your credit scores by decreasing the diversity of your credit mix. Creditors like to see that you can responsibly manage different types of debt. Paying off your only line of installment credit reduces your credit mix and may ultimately decrease your credit scores.
Similarly, if you pay off a credit card debt and close the account entirely, your scores could drop. This is because your total available credit is lowered when you close a line of credit, which could result in a higher credit utilization ratio. Additionally, if the account you closed was your oldest line of credit, it could negatively impact the length of your credit history and cause a drop in your scores.
Let My Credit Card Debt Go To Collections?
FAQ
Will my credit score go down if I don’t pay my bill in full?
Consequences of a missed payment include: The lender typically reports this to the credit bureaus. It can lower your credit score.
Does not paying the full amount affect credit score?
Yes, not paying the full amount owed can affect your credit score. Carrying a balance and paying only the minimum can increase your credit utilization, which is a significant factor in determining your credit score.
Is it bad to not fully pay off your credit card?
Will my credit score go down if I don’t pay my full statement balance?
Both your statement balance and current balance can affect your credit score. Credit card issuers typically report cardholder activity — including your balances and recent payments — to the three major credit bureaus at the end of a billing cycle.