5 Reasons a Maxed-Out Credit Card is Bad
Question:
My credit cardi is maxed out and I’m struggling to pay it down. How will this affect my credit in the long run?
Answer:
That’s a great question and it’s something that many people struggle with so you’re not the only one going through this. Credit cards have a maximum credit limit – which is the maximum amount you can charge before a penalty. But this doesn’t mean that you should max out your credit limit on your card. In fact, bad things often happen when you max out or come close to maxing out your credit limit on your card.
Your Credit Score Drops
A large part of your credit score – 30% to be exact – is based on how much of your available credit you’re using. This ratio of credit card balances to credit limits is known as your credit utilization. The higher your credit utilization, or the close your credit card balances are to your credit limit, the more your credit score is hurt. Maxing out one credit card is pretty bad for your credit score. But maxing out all your credit cards is much worse.
Lenders Don’t Like It.
Whenever you apply for a loan or a new credit card, lenders want to see how much of your available credit you’re using. If your credit balances are too high – typically 50% or more – then banks will see you as a high risk user and as someone who has more debt than they can handle. So as you can see, a maxed out credit card could easily get your credit card application or loan denied because the banks fear that you might not be able to pay them back in full and on time.
You Risk Exceeding Your Credit Limit.
Even if you keep your balance just below your credit limit, you could still end up over your credit limit once finance charges are applied to your balance. Once your balance goes over your credit limit, it can be difficult to get it back down since you get charged an over-limit fee each month your balance is over the limit. So stay far away from your credit limit if you want to avoid an over-limit fee.
Your Balance Is Harder To Repay.
Depending on what your credit limit is, having a maxed out credit card could take years to pay off, especially if you’re only paying the minium monthly balance. The problem is that although you may intend to pay off the balance in full, it could be difficult to part with that much cash at one time as your payment date approaches.
You Might Trigger The Default Rate From Your Lender.
Most people aren’t aware of this, but credit card companies are well within their rights to raise your interest rate on your card if you violate your credit card terms and max out your credit card. The default rate is the highest interest your credit card company can charge and is typically a minimum of 30%. And a high interest rate applied against and even higher credit card balance is disasterous for a credit card repayment plan.
The Last Word.
It’s best to keep your credit card balance below 10% of your credit limit. That’s typically a manageable credit card balance that’s good for your credit score and acceptable to lenders. To avoid maxing out your credit card by mistake, check your credit limit before making a credit card purchase.
Most people understand that maxing out credit cards is bad, but they don’t understand the consequences that happen behind the scenes and how it can affect you in the long run. If you need to repair your credit, start working on the simplest things first like paying more than the monthy minium payment. If you’re still struggling to fix your credit, try talking to your lenders. You’d be surprised how many of them are willing to work with you.
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