The relationship between your credit card balance and your credit score

Credit card balances in the United States

Credit card balances hit a new all-time nationwide high of $1.14 trillion at the end of June 2024. This is an 11% increase compared to June 2023.² 

The last record for credit card balances was set in 2019, with a slight decrease in spending during the pandemic. Despite decreasing inflation, there have been marked increases in balances across multiple age groups in the last two years.^2,3 

How your credit card balance impacts your credit score

While it’s weighed differently by every credit bureau, your credit score takes into account how much you owe and how well you're managing your debt. This is also commonly referred to as credit utilization or credit capacity.

When it comes to credit cards, your score takes into account how much you owe in relation to your available credit. When your credit card balance uses more than 30% of your available credit, this is weighed more negatively on your score.⁴ For example, if you have $1,000 of available credit on your credit card and use more than $300, you would use more than 30% of your available credit. A low utilization rate shows lenders that you can responsibly manage the lines of credit you're given.

Statistically, people with the highest credit scores have utilization below 10%. Among people with a perfect FICO score of 850, their utilization was 4% or below.^4,5

Why a high credit score is important

Your credit score follows you throughout your entire life. Building and maintaining a high credit score will help you when you need to apply for loans to purchase things like a home, car or RV.

Some employers and landlords also run credit checks as part of their applicant screening process. Also, if you hope to start a business and need a loan, one part of the due diligence for your loan application is checking your personal credit score.⁶  

Ways to pay off your debt and lower your utilization

As you’ve heard us say countless times, paying off credit card debt is a fantastic goal. Credit card debt tends to have some of the highest interest rates in the nation, and it can feel very freeing to pay off.

When you pay down your credit card debt, we suggest keeping your credit cards and lines of credit open so that you still have available credit on your credit report. Keeping your credit lines open will show your credit utilization going down, which should help improve your credit score.

When paying off your debt, we recommend taking a strategic, targeted approach to your payments. Start by allocating any extra payments to one specific payment, and only pay the minimums on your other loans. Once that bill is paid off, take what you were putting toward that payment and put that amount toward the next bill you want to pay off in addition to its minimum payment.

Continue this process, progressively increasing the amount you’re paying toward a single bill until all of your debt is paid off.

Balance transfers and consolidation loans

Another common method of paying off credit card debt is to move all their balances to a lower-interest balance transfer credit card or consolidation loan.

This will increase the available credit on your credit cards, improving your credit utilization rate. Furthermore, the less interest you pay in the long run, the better.

There are two important things to take note of with consolidation loans:

• You need to keep your credit cards open
• You need to avoid building up a new balance on your cards

Unfortunately, a common mistake that is made with consolidation loans is people will close out the card that they paid off. This will damage your credit history and lower your credit utilization. Furthermore, some people have a hard time resisting spending on their card that has more available credit on it.

Taking out a consolidation loan or moving your credit card balances to a low rate balance transfer card is a good way to pay less interest and free up your capacity, but we advise you to do so with caution.