13 Aug 2015

DEFINITION of ‘Balance Chasing’
The gradual lowering of a consumer’s credit limit by a credit card issuer as the consumer pays down the card’s balance. Balance chasing means that instead of a consumer freeing up credit as she pays down her balance, she continues to have little to no available credit. A credit card issuer might engage in this practice if it wants to limit its risk by limiting the amount of credit available to a particular consumer. Unfortunately, there is nothing a consumer can do to prevent a credit card issuer from chasing his balance.

Balance chasing may be more likely to happen if the consumer engages in behaviour that makes him look like a high-risk borrower, such as making a late payment or defaulting on another card.

An unintended consequence of balance chasing is that it can make it difficult for a consumer who is trying to get out of debt to improve his credit score. About one-third of your credit score is based on your credit utilization, which is the percentage of your available credit that you’re using. The lower the percent of credit in use, the better it is for your score. If you’ve maxed out a $5,000 credit line, your credit utilization is 100%. If you then pay down that balance to $4,000 and your credit line remains at $5,000, your credit utilization drops to 80%. But if the credit card issuer chases your balance and your credit limit drops to $4,000 as soon as you pay your balance down to $4,000, your credit utilization remains at 100% and your credit score will not improve. The good news is that on-time payments also account for about one-third of your credit score, so you may still see a boost in your score as you pay down your debt as long as you don’t miss any payment due dates.

If you’re still making new purchases with the card that you are paying down the balance on, make sure to pay attention to your available credit. Balance chasing could cause your available credit to drop unexpectedly and cause your card to be declined. In a worst-case scenario, if you have opted in to credit card overlimit fees, your transaction could go through but you could then be charged a fee for exceeding your credit limit. Plus, since you’re already carrying a balance on the card, you’ll be paying interest on your new purchase from the moment you make it.

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