Maxing out your credit card simply means spending up to or above your credit limit. There are two factors that card issuers consider when setting your credit limit, these include: your credit history and your income. Your credit history has to do with your credit score which is determined by the way you handled your credit in the past. The better your credit score, the higher your subsequent credit limits. Whether you have a low or high credit limit, it’s not advisable to max out your credit card for the following reasons;
01 It can affect your credit score | 7 Reasons Maxing Out Your Credit Card Is Bad
A large part of your credit score—30 percent—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 closer your credit card balances are to your credit limit, the more your credit score is hurt.
Maxing out your credit card is really bad for your credit score. Fortunately, your credit score can recover as you pay down your balances, but first, you have to stop creating more debt.
02 A Red Light For Lenders | 7 Reasons Maxing Out Your Credit Card Is Bad
If you have the habit of maxing out your credit card balances, it could lead to you being denied a mortgage or a car loan. When you apply for a loan, the bank will check to see how much of your available credit you’re using. If your credit card balances are too high, banks take that as a sign you already have more debt than you can handle.
03 You risk going over your credit limit | 7 Reasons Maxing Out Your Credit Card Is Bad
Maxing out your credit card brings you closer to your credit limit. When finance charges are applied, you can easily exceed your credit limit. Once your balance goes over your credit limit, additional penalties can be applied, which will put you even further over your limit. It can be difficult to get it back down, especially if you’re making only the minimum payment each month, which usually covers only the interest and rarely much more.
04 The balance is harder to repay | 7 Reasons Maxing Out Your Credit Card Is Bad
Depending on your credit limit, a maxed out credit card balance could take years to repay, particularly if you make only the minimum payment each month. You may plan to pay the balance in full, but other unexpected expenses might make that too difficult to do as the payment due date approaches.
05 You could trigger the penalty rate
Credit card companies have the right to raise your credit card interest rate if you default on your credit card terms by exceeding your credit limit. The penalty rate is the highest interest your credit card company can charge and could be 30 percent or more depending on your credit card terms. A high interest rate applied to a high balance can be disastrous because it might mean you are making large monthly payments that are being applied only to interest and not lowering your balance.
06 The minimum payment is higher
Your credit card’s minimum payment is based on the size of your credit card balance. As your balance increases, so do your monthly minimum payments. Maxing out your credit card increases the amount you’re required to pay each month.
07 Defeats the purpose of a credit card
One of the reasons for getting a credit card is to have access to credit when you need it. However, maxing out your credit card eliminates that benefit. It makes your credit card feel like a burden. You won’t be able to use your credit for an emergency or even to book a rental car or hotel.
A Reasonable Credit Card Balance
It’s best to keep your credit card balance low enough that you can afford to pay it off each month, keeping in mind that any balance higher than 30 percent can have a negative impact on your credit score. To avoid maxing out your credit card by mistake, check your credit limit before making a credit card purchase.