Don’t Get Too Comfortable with Credit Card Debt… It Can Lower Your Score

If you're like millions of other people all over the country, you probably carry some amount of credit card debt through your everyday life. However, what you may not know is that allowing those obligations to pile up will end up costing you a lot of money, and could even have a negative impact on your credit scores.

Recent polls suggest that in general, Americans are more than comfortable carrying at least some credit card debt. While most people may get a little nervous when their combined balances across all the accounts in their names stretch toward five figures, they may not be so concerned when it's hovering in the mid-four figure range. However, depending on a number of factors, that might actually have a negative impact on all aspects of your finances including your overall credit standing.

For these reasons you might want to evaluate where you stand and see whether you're putting yourself in a bad position simply by carrying the amount of debt you currently control.

Why this can be a problem
The most basic reason that having any amount of credit card debt carrying over from one month to the next is that it will take money that you might have been able to contribute to other financial needs out of your coffers. In some cases, these added costs can be as much as a hundred dollars or more per month, and can therefore give you very little in the way of financial flexibility that you might need to address other needs, including your savings plans.

Moreover, carrying a large amount of debt — and this is often defined as being more than you can afford to reasonably pay off within a month or two if need be — can also cut into your credit score in a very serious way. The second-largest factor that goes into determining your scores is based heavily on this situation; the amount you owe across all your accounts versus the total combined limits on those cards, when viewed as a percentage, accounts for a full 30 percent of your ratings. Coincidentally, the amount you're allowed to carry without your credit score starting to erode is about 30 percent of your limits. Once you pass that threshold, your score will likewise begin to fall.

For example, if you have $4,000 in credit card debt across four cards with a limit of $10,000 altogether, your "credit utilization ratio" is 40 percent, considerably higher than the $3,000 you'd be able to carry at the most to have a perfect rating in this regard. That means that if you want to improve your score, and your total finances, you'll need to cut at least $1,000 from your total debt, which could take you a few months or more of careful work to limit your spending and simultaneously increase the value of your monthly contributions into your balances.

Only after you've cut your debt considerably, to the point where the payments are very affordable, can you be assured that you're handling them properly.

Another potential issue
Before you begin paying down that debt, the higher costs that come with large monthly credit card bills can also put your credit score in jeopardy in another, more serious way. Where a credit utilization ratio is the No. 2 factor used to determine your score, the No. 1 factor is your ability to pay all your bills on time and in full. Of course, larger debts mean larger monthly minimums, and these could stretch into unaffordable territory if you carry balances that are too large.

That means that if you miss even one payment on one account for one month, your credit score could fall by 100 points or more, and it would take you at least several months of perfect credit behavior to return your rating to where it once was. Further, that misstep will remain on your credit report itself for a period of several years, so creditors will be able to see whether this is a habit you have a history of falling into every once in a while, or if it was simply an isolated incident that you never repeated again.

Finally, speaking of credit reports, just as lenders are able to use these documents to evaluate your borrowing history, you may be able to do so for a different reason. Making sure to regularly acquire these documents and check them over closely may allow you to determine whether there are any unfair markings that might be dragging down your ratings without cause. If so, you might want to contact a credit repair law firm about the matter, as this may allow you to start the credit repair process and get your score back where it deserves to be.