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Which Is Worse: Maxing Out a Card, or Carrying a Balance on Several?

Sept. 12, 2014
Credit Score, Personal Finance
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When you’re juggling a credit card balance (or several), there are a lot of immediate questions to be answered. How will you make the payments? How much interest are you racking up? Which card should you pay first?

But longer term, you’re probably also wondering how all this will affect your credit score. This begs another question: Is it worse to carry all your debt on one card and max it out, or spread what you owe among several? Although neither is ideal, there is a clear answer. Take a look at the details below to find out what it is.

Utilizing too much credit is never good for your score

First, let’s be clear about one thing: Using too much of your available credit is bad for your credit score. This stems from the fact that 30% of your score is determined by amounts owed, and the most important factor here is your credit utilization ratio.

Your credit utilization ratio is the amount you owe on your credit card(s) compared with the total amount of credit you have available. So, if you have a credit limit of $10,000 and your outstanding balance is $2,000, your credit utilization ratio is 20%.

The rule of thumb is to keep credit utilization ratio at 30% (and lower is better). This goes for both what you owe on each of your individual cards, and what you owe across all your cards. In other words, don’t let a single card’s utilization ratio creep above 30%, which will in turn keep the cumulative amount you owe below 30% of your overall available credit.

Maxing out a credit card is usually worse

Now it’s time to discuss which is worse for your credit score, maxing out a credit card or carrying a balance on several. The answer? Assuming you’re keeping the balances on the multiple cards low, it’s worse to max out your card.

If you’ve maxed out a credit card, you’ve gone well beyond the 30% utilization threshold discussed above. This will likely cause a huge drop in your credit score, because it indicates that you’re not good at handling borrowed money.

What’s more, if you attempt to apply for new credit with a maxed-out card on your report, you could be putting your chances of getting the loan in jeopardy. Lenders tend to be wary of customers with maxed-out credit cards, especially if they have a less-than-perfect credit history to begin with.

On the other hand, carrying a balance on several credit cards isn’t necessarily damaging to your credit profile. If you’re keeping your credit utilization below 30% on all of them, at all times, your credit score isn’t likely to take a big hit.

Of course, if you’re not paying off these balances in full every month, you’re going to get hit with interest charges. This could get pretty expensive over time, but that’s a completely separate problem from the credit score concern.

How to get your credit utilization under control for good

If you’re constantly doing battle to keep your credit utilization below 30%, we can help. Here are a few tips for taming the balance beast:

  • Keep a budget. This will help you manage how much you’re charging.
  • Track your spending online. By frequently logging into your credit card’s online account, you’ll be able to catch overspending before it gets out of hand.
  • Plan for multiple monthly payments. By paying your credit card bill twice each month, you’re reducing the chances your utilization ratio will ever exceed 30%.
  • Find out when your credit card issuer reports to the credit bureaus each month, and make a big payment in advance of that date.
  • Keep more than one credit card on-hand. If you’re starting to get about 30% credit utilization on one card and can’t make a payment, having a backup is helpful.

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