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What happens when you carry a credit card balance?

Carrying a balance can be useful, but watch out for high APRs and fees.

Sometimes, it’s necessary to carry a balance on your credit card to financially cope when life throws unexpected things your way or when you have to make a large purchase. Of course, being able to carry a balance is a convenient credit card feature that could help you pay off such purchases in the long term.

But the downside is you’ll pay interest and fees, and, in some cases, it may affect other loan applications negatively.

What does it mean to carry a balance?

Say you buy a new TV for $1,000. Your due date can be months after the close of each billing cycle. If you pay your entire balance during this time, you won’t pay interest on your purchase. But if you don’t pay the entire balance, you must pay at least a percentage of it to avoid paying fees.

What are the consequences of carrying a balance?

At first glance, paying off your new TV in smaller increments for a longer period of time could lower the burden on your wallet. However, this feature doesn’t come for free. For example:

You will accrue interest

Interest is charged for any balance owing on a credit card at the end of the statement period. The rate of interest you pay depends on the type of balance, with 4 main categories:

  • Purchases.
    Most new transactions made on your credit card are defined as purchases and are subject to the purchase annual percentage rate (APR). Depending on your card, this rate could be as low as 9% or as high as 28% variable.
  • Balance transfers.
    Moving debt from an existing account to a new credit card is known as a balance transfer. When this balance is added to your account, interest applies at the balance transfer rate. Many cards offer a 0% intro APR period on balance transfers for a long period of time. After the intro period passes, you’ll get the standard revert rate, which is often the same as the purchase APR.
  • Cash advances.
    Cash advance transactions, such as ATM withdrawals or gambling purchases, usually have a higher interest rate than purchases. This rate is always applied from the day the cash advance is made and will be charged until the whole balance of that transaction is paid in full.
  • Penalty APR.
    Most credit cards will apply a penalty APR of up to 32% variable if you make a late payment or if you fail to make the minimum payment when due. Depending on your card’s terms and conditions, the penalty APR could last indefinitely and you will lose any ongoing 0% intro APR period promotion.

You could pay fees

Every time you fail to make the minimum payment by the due date, you’ll pay up to $48 depending on your card. Cards issued by credit unions typically charge late payment fees that can be as much as 50% less. This could be an option if you’re often late on your payments.

It could affect other credit card or loan applications

Lenders assess applications for new credit based on factors including your income, current debt and credit history. This means when you apply for any new form of credit, any unpaid balances could influence the lender’s final decision. Also, any balance you carry increases your utilization rate. If it’s higher than 36% it may significantly impact your other loan applications.

Another factor to consider is how carrying a credit card balance could affect your credit history. Account payment details, such as how much you owe, are included in your credit report. So, if you don’t make the minimum payment, miss the due date or default on your account, it will affect your credit history and any new applications you make.

What should I do if I can’t make a payment on my card?

If you find that you’re struggling to make your credit card payment by the due date, stay calm. These steps will help you deal with it.

  1. Contact your credit card company. Explain your situation as soon as possible. This can reduce stress and also help you find a reasonable solution based on your circumstances.
  2. Discuss a payment plan. Credit card companies are experienced with these scenarios and will be able to advise you on your payment options. Usually, this will involve a payment plan that suits your current financial and personal circumstances. In some cases, they may also freeze your account until your circumstances improve.
  3. Develop a budget. Once you have made your credit card issuer aware of your circumstances, plan a budget for repaying this debt. Consider using any available assets to pay down the card, including savings.

Another important thing to remember is to regularly check your credit card statements so that you know how much you owe. The sooner you can deal with this debt, the less negative impact it will have on your finances.

How can I manage my credit card balance?

Here are a few ways you can manage your credit card balance:

  • Make balance transfers.
    Moving your credit card debt to a new card with a 0% intro APR period can help you save money on interest charges and pay off the balance faster. Just make sure you check the length of the intro period and the standard rate that applies after that time.
  • Set up automatic payments.
    Most credit cards let you set up automatic payments from a transaction account. This will ensure you make payments by the due date on your statement. Usually, you can choose whether you pay just the minimum, or the full amount owing. Pay the full amount to avoid carrying debt at the end of the statement period.
  • Spend what you can afford.
    Treat your credit card like cash and aim to use it only for purchases you can afford based on your income. This way, you should be able to pay off the balance in full every month.
  • Get a card that works for you.
    If you know you regularly carry a balance, compare cards to find one that offers a low ongoing interest rate so that you can reduce the additional charges applied to your account.
  • Consider other payment options.
    Carrying a balance on your credit card costs money. If you can find another way to make payments, such as by saving up for planned purchases or setting money aside for emergencies, it will help reduce the overall cost of your spending.

Compare low interest credit cards

If you are going to carry a balance, consider a card with low interest. Note that purchase and balance transfer APRs can vary widely and can be as low as 9% or as high as 28% variable.

Name Product Purchase Interest Rate Cash Advance Rate Annual Fee Minimum Income Reward
BMO Preferred Rate Mastercard
12.99%
22.99% (21.99% for Quebec residents)
$20
$15,000
Take advantage of an introductory balance transfer offer, annual fee waiver in the first year, and low purchase and cash advance interest rates.
Get a rate of 3.99% on balance transfers for 9 months with a 1% transfer fee. Plus, get the $20 annual fee waived in the first year.
Scotiabank Value Visa Card
12.99%
12.99%
$29
$12,000
Save on interest for 6 months by consolidating your higher-rate balances with the balance transfer offer, and get an on-going 12.99% interest rate on purchases, cash advances and balance transfers.
Get a 0.99% introductory interest rate on balance transfers with a 0% transfer fee for the first 6 months. Apply by July 1, 2021.
HSBC +Rewards™ Mastercard®
11.9%
11.9%
$25
N/A
Earn 2 Points for every $1 spent on eligible dining or entertainment purchases.
Earn 2 Points for every $1 spent on eligible dining or entertainment purchases.
BMO Rewards Business Mastercard
14.99%
22.99%
$0 annual fee for the first year ($120 thereafter)
N/A
Earn 3 BMO Rewards points for every $1 you spend on gas, office supplies, cell phone bills and internet bills, and earn 1.5 BMO Rewards points for every $1 you spend elsewhere.
Get 35,000 points and the $120 annual fee waived in the first year (a total value of $295 when you pay with points).
Business Platinum Card from American Express
N/A
N/A
$499
N/A
Earn 1.25 Membership Rewards points for every $1 spent on eligible purchases
Earn a Welcome Bonus of 75,000 Membership Rewards points in your first three months of Cardmembership.
American Express Business Gold Rewards Card
N/A
N/A
$250
N/A
Earn 2 Membership Rewards points for every $1 spent on eligible purchases at select American Express merchant suppliers in Canada (choose 3 suppliers), and earn 1 Membership Reward point for every $1 spent on eligible purchases elsewhere
Earn a Welcome Bonus of 50,000 Membership Rewards points when you spend at least $5,000 on eligible purchases within the first three months.
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Bottom line

While it’s easy to carry a credit card balance, it will have a serious impact on your account. Being aware of these factors and the ongoing implications of credit card debt will help you make informed decisions about how you manage your balance so that your card works for you.

A low interest rate credit card can help you save money in the long run, but be sure to compare your options before applying for one.

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