Your credit score is not the only number important to your finances - you should also keep a close eye on your credit card balances. - News-Credit-Mortgage-Coin


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Monday, September 28, 2020

Your credit score is not the only number important to your finances - you should also keep a close eye on your credit card balances.

  •  Credit card balance is the amount of money charged from your credit card and represents how much you owe the credit card company.
  • It is very important to avoid carrying a large monthly balance on your card, as you must pay your bank interest to cover your expenses.
  • Your credit card balance also has a big impact on your credit score. The lower your balance, the higher your score.
  • If you have a large credit card balance, you may want to consider transferring to a low APR card.

If you are new to the world of credit cards, you are probably looking at the welcome offers and expecting a high number: a huge signup bonus that can reward you with tens of thousands of points.

To get the payoff for this high number, you need to keep another number very low - this number is your credit card balance.

What is the credit card balance?
Your credit card balance reflects how much you owe your bank at any given time for all transactions recorded in your account. Every time you swipe, insert or tap your credit card, your bank confirms this and the amount is reflected in your balance.

At the end of each billing cycle, your bank counts everything you owe. Then the bank will send you a statement balance containing a complete summary of all the expenses it has put in front of you. Depending on the amount you owe the bank will ask you to make a minimum payment. Usually it is a small fraction of the total statement balance.

If you make the minimum payment, the rest of the money will be transferred to a new billing cycle, but not the same; it gets bigger. Your bank charges interest on your credit card balance even if you do not take any further action.

Here's a simple rule of thumb for your credit card balance: Keep it as close to zero as possible. If you pay the full amount each month until your due date, the APR of your credit card will not matter and you will not be able to pay any financial costs.

What does your credit card balance do to your credit score?
Your balance will do more than affect how much you pay your bank to use your credit card. It can also play a role in how much you pay for other financial products like mortgages or car loans. This is because your credit card balance is an important factor in determining your credit usage rate, which is an important component of your overall credit score. The lower your balance, the better your credit usage rate.

Let's say you have a credit card with a credit limit of $ 10,000 and you currently have a $ 1,000 balance. Your loan utilization rate is 10 percent. This is good - most experts say you want to keep this rate below 30 percent.

Now suppose you have a $ 5,000 balance on the same card. Your loan usage rate increases to 50 percent. If you decide to apply for a loan to buy an apartment, this large balance and a lower than star rate will confuse the bank that decides whether or not to borrow cash.

Your application may be rejected or you can pay a higher interest rate for the mortgage. Why is that? Because carrying too much on your credit card makes it look like you will pay all your bills. You appear to be a greater risk of default.

You can transfer your balance to a new card, but this is not free
If you are carrying a credit card balance, you may tend to transfer that balance to a new credit card that offers an initial APR of 0%.

This logic makes sense: If you don't have to pay interest, you can focus on getting rid of your balance. However, it's important to remember that most cards charge a percentage fee from the balance.

For example, you may want to transfer a balance of $ 5,000. Before doing this, be sure to read the thin print of the new card to fully understand how much it will cost. The new card will likely get 3% to 5% of the amount from you. So, a 5% fee on a $ 5,000 transfer means an additional $ 250. If you're paying a 15% APR on your current card, this transfer fee may be worth it.

Keep a close watch on your credit card balance. If it starts escalating into uncomfortably high zones, it's time to take a closer look at your spending habits to avoid falling into a debt trap.

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