Negative balances can affect your credit score. A negative balance means that you owe more money than what’s available in your bank account. This is an important topic to discuss because if you’re going to apply for a loan or open a line of credit, you must know how this will affect your credit score.
What is a negative balance?
A negative balance is a situation where you owe more money than your checking account.
It happens when you withdraw more funds than the amount of money currently in your account or if you make payments that exceed the amount contributed to your checking account.
How does a negative balance occur?
If you use a credit card for purchases, you may have a negative balance if:
- You pay the full balance of your monthly statement each month. If so, this is normal and expected.
- You make large purchases on the card and end up with a small balance left to pay off at the end of the month. Again, this is normal and expected (and not very different from having $0 in your bank account).
The effect of a negative balance on your credit score
When you carry a negative balance on a credit card, it will appear on your credit report. The negative balance is recorded as a charge-off and will stay on your credit report for up to 7 years. However, as per the experts at SoFi, “And if you’re concerned, a credit card negative balance could impact your credit score, don’t fret — it won’t. Credit scoring models generally treat negative credit card balances as the equivalent of a $0 balance.”
In addition to recording this data, lenders use the information the three major credit bureaus reported to calculate their scores. A higher number means that you are more likely to pay back debts in full; conversely, it means that if you don’t pay off the debt entirely, then any collection agency or creditor can sue you for the rest of what is owed them
How to get rid of a negative balance on your credit card?
If your balance is causing you to fall behind, there are several actions you can take.
- Pay the balance in full: Your first step should be to pay off your debt as soon as possible. Making all your payments on time and keeping a positive balance on your account may help improve or maintain your credit score.
- Pay the balance in installments: If you cannot pay off the full amount at once, consider paying it off over time by setting up monthly installments through automatic payments from another bank account or credit card with available funds. This will ensure that the remaining balance gets paid off within a certain period while also maintaining a positive payment history and good standing with creditors (thus improving or maintaining their scores).
Negative balances can cause problems for your credit score
A negative credit card balance can cause problems for your credit score. This is because most lenders look at the amount of available credit remaining when they evaluate whether to extend a loan or whether you are eligible for an increased line of credit. If you have very little available credit left, lenders may view it as risky and result in a lower score.
We hope we’ve helped you understand the importance of your credit score. Knowing how it works and what impacts it can help you take control of your finances and avoid any negative effects. We also want everyone to be able to enjoy their lives without having to worry about money.