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How much you owe on your credit cards and loans can certainly affect your credit, for better or worse. Making on-time payments and reducing your balances can help you save on interest and improve your credit, but the opposite is also true. Paying late or maxing out your credit cards can work against you. This is why it's important to keep tabs on your account balances.
What Is an Account Balance?
An account balance on a credit account is the amount you owe, whether that's on a revolving account like a credit card or an installment loan like a mortgage. In either case, you're borrowing money and agreeing to repay it with interest. If the lender reports your account activity to the three major credit bureaus (Experian, TransUnion and Equifax), it'll show up on your credit reports and affect your credit scores.
Credit accounts are different from checking and savings accounts, which hold your cash deposits and allow you to make withdrawals as needed. Every withdrawal reduces the available balance you can draw on. These accounts do not appear on your credit report.
Do All Account Balances Affect Your Credit?
Account balances will only affect your credit if they appear on your credit report. Most major credit card issuers and lenders report account activity and balances to all three credit bureaus. The way each balance affects your credit score will depend largely on the account type.
How a Credit Card Balance Affects Your Credit Score
Most credit scoring models consider your credit utilization rate, or the amount of available credit you're using on revolving accounts like credit cards. Let's say you have the following two credit cards:
| Credit Limit | Current Balance | |
|---|---|---|
| Card 1 | $1,000 | $500 |
| Card 2 | $3,000 | $1,000 |
| Total | $4,000 | $1,500 |
Your total credit utilization rate would be 37.5% ($1,500 / $4,000). The lower this percentage is, the better for your credit score. Once it hits 30% or higher, it will likely have a more pronounced negative effect on your score. Some credit scoring models also consider whether your utilization rate has recently increased or decreased.
How a Line of Credit Affects Your Credit Score
Lines of credit typically affect your credit score in the same way that credit cards do. The higher your credit utilization rate, the more it can impact your score—but not always. For example, some credit scoring models exclude home equity lines of credit (HELOCs). However, personal lines of credit, which are offered by some banks, credit unions and online lenders, are usually included.
How a Loan Balance Affects Your Credit Score
Instead of providing a credit line that you can borrow against as needed, installment loans offer a lump sum of cash upfront. You'll then repay it over time with fixed monthly payments. These balances are included in the total amount you owe, which makes up 30% of your FICO® Score☉ Θ.
The amount you owe and the number of outstanding loan balances you have can affect your credit score. But, like credit cards, installment loans can also improve your credit mix and give you an opportunity to make consistent on-time payments. Those two things together can help your credit.
How a Bank Account Balance Affects Your Credit Score
Bank account balances do not affect your credit score, but with your permission, some creditors might consider your bank account transaction data when making a lending decision—a practice known as cash flow underwriting. This provides an alternative way for them to assess risk and be more inclusive in their lending practices. Cash flow underwriting is geared toward consumers who have a thin credit history.
How to Manage and Pay Off Multiple Account Balances
Here's how to manage your accounts and get out of debt when you're juggling multiple account balances.
- Set up autopay. Opting for automatic payments can prevent a bill from falling through the cracks. Once a payment is 30 days past due, the creditor can report it to the credit bureaus, which will likely hurt your credit score. You can also expect late fees.
- Consolidate your balances. Debt consolidation involves using a new loan or credit card to pay off one or more of your existing debts. This could help you secure a lower interest rate, get a lower monthly payment and pay off your debt if you're having a hard time juggling multiple accounts. You can do this through a debt consolidation loan or a 0% intro APR credit card. Keep in mind you'll need good credit to qualify, and there may be upfront fees.
- Choose a debt repayment strategy. Start by listing all your account balances, monthly payments and interest rates. With the debt snowball method, you'll put extra money toward whichever account has the lowest balance. Once that's paid off, you'll move on to the next smallest balance, and so on. The debt avalanche takes the same approach but prioritizes whichever account has the highest interest rate. Each strategy has its own pros and cons; what matters most is picking a strategy and sticking with it.
- Reduce your expenses. Finding ways to save money can free up cash for you to put toward your account balances. That may involve canceling subscriptions, cutting back on restaurants, shopping around for new car insurance or negotiating your bills.
Learn more: What's the Best Way to Pay Off Debt?
The Bottom Line
Any account balance that's reported to the major credit bureaus will affect your credit score. That could either work in your favor or hurt your credit. No matter what, paying your bills on time every month and keeping your balances low are what matter most. You can check your credit report and FICO® Score for free from Experian to see how you're doing.