Credit cards can be powerful tools. Paying with a rewards card, for example, can be an effective way to save money if you’re earning points, miles or cash back on what you buy. If you routinely carry a balance, however, you could be hurting yourself without realizing it. Here’s what you need to know about the consequences of failing to pay off your credit card balance each month.
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1. You’re Not Helping Your Credit Score
One of the most pervasive myths about credit cards is that you need to be in debt to build or improve your credit. After all, your payment history accounts for 35% of your FICO® score, so that means you have to have some debt to pay off right? The problem with this assumption is that it can actually push your score down instead of up.
Lenders often focus on your credit utilization ratio, which is the amount of debt you owe versus your total credit line. The higher your ratio, the riskier you appear. Paying off the balance each month can keep your utilization ratio low and might suggest that you’re responsible when it comes to managing your finances.
2. It Could Make Your Insurance More Expensive
If you drive a car, own a home or rent one, you need to have insurance to protect your property. When you apply for a policy, the insurance company may take a look at your credit and debt-to-income ratio to gauge your risk level. If you’re carrying a decent amount of debt on one or more credit cards, that could raise a red flag.
Insurers take a calculated risk when they extend coverage to someone and your financial situation influences what they charge. When you’ve got credit card debt, it might give the impression that you can’t stay on top of your bills. The insurance company may assume that you’re irresponsible in other areas and the end result might be higher premiums.
Related Article: What Is a Debt-to-Credit Ratio?
3. 0% Interest Promotions Don’t Always Save You Money
One of the worst consequences of carrying a balance on your credit card is the amount you’ll shell out on interest. If you’ve got a $5,000 balance at a rate of 15% and you’re just making a $100 minimum payment each month, you’ll hand out nearly $3,000 in interest to the credit card company once it’s all said and done.
Transferring your balances to a card with a 0% interest rate might seem like the perfect solution, but it’s not foolproof. These promotions tend to last for a brief period of time and if you don’t pay off the balance before they expire, you could still end up paying interest.
What’s more, you might also have to pay a fee upfront to transfer the debt to a different card. Fees often amount to 3%, but they can be as high as 5% of your balance. If your goal is to eventually pay the card off, you might not want to make the mistake of thinking that a promotional offer is going to be a free ride.
Find out now: Which credit card is best for me?
The Bottom Line
Using a credit card can help you build good credit, but there’s a right and a wrong way to do it. Carrying debt over from month to month to try and improve your score could actually sabotage it in the long run and cost you big bucks in the process.
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