Consumers with risky credit scores are about three times more likely to be “guns” than those with blue chip credit scores, according to a study by the American Bankers Association. Revolving is a term for carrying a month-to-month credit card balance instead of paying off in full.
Here is the percentage of consumers who were guns in each credit score group:
- Subprime (less than 680): 90.2%
- First (680 to 779): 68.5%
- Super bonus (780 and more): 27.3%
This is a significant difference with each group. Once you understand how much a credit card balance can affect you, it will make sense for the more credit-savvy consumers to try to avoid it.
The dangers of carrying a credit card balance
With credit cards, you save money by paying off the full statement balance each month. If you do, you will not be charged any credit card interest on your purchases. If you have a balance, the card issuer may charge interest on it.
It’s not just the interest charges that make maintaining a balance dangerous. It’s getting into the habit of spending more than you can repay and gradually taking on more and more credit card debt.
For example, let’s say you start with an outstanding balance of $ 500 a month. On a card with an 18% APR, that would cost you around $ 7.50 in interest. You don’t pay much more at this point.
But the next month you still have $ 300 that you can’t pay. You now have an outstanding balance of $ 800, and the card issuer adds $ 12 in interest. If you let this become a habit, you will go into more debt and it will cost you more.
Credit card debt statistics show us how common this is. The average card balance was over $ 6,000 in 2019. This debt almost never results from a purchase over $ 6,000. Usually this is because the balance is increasing from month to month.
Maintaining a balance can lower your credit score
In addition to credit card debt, having a balance can also hurt your credit. Much of your credit score depends on your credit utilization rate – your credit card balances divided by your credit limits.
The rule of thumb for using credit is less is better, and it is recommended that you keep your credit usage below 30%.
If you carry a balance of $ 750 on a card with a limit of $ 1,000, your credit usage would be 75%. As it is rather high, it would have a negative impact on your credit score.
This is another reason why it helps to pay off your credit card consistently. You will not run the risk of accumulating a large balance that will lower your credit score.
How to use a credit card
Credit cards allow you to pay off your purchases over time, but that’s not the best way to use them. It’s best to stick to a budget and always pay the full statement balance.
When you do this, you get all the benefits of credit card purchases, such as earning rewards and getting free shopping protections. And you don’t need to pay anything extra in the form of interest charges.
There is one exception, and that is 0% APR credit cards. These cards charge no interest on purchases during an introductory period. If you have to pay for something expensive and can’t cover the full cost up front, this is the type of credit card you should use. Even with a 0% APR card, try to pay off the balance as quickly as possible so that it doesn’t cost you money at the end of the introductory period.
Payment habits is one area where there is a marked difference between consumers with the highest and lowest credit scores. If you’re new to credit, it’s worth keeping up with what consumers are doing with super-premium scores and paying off your balance in full. And if you currently have one or more balances, start planning how you can get out of credit card debt and stay out in the future.