Credit cards can be convenient and often offer perks and discounts that aren’t available when paying by cash. But there can also be pitfalls, a prime example being maxing out the card to its spending limit. Here are seven reasons why this should be avoided if at all possible.
1) Your credit score can drop
A large part of your credit score (circa 30%) is based on how much of youravailable credityou’re using (this ratio of credit balances to credit limits is known as yourcredit utilisation). The higher your credit utilisation, or the closer 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. Maxing out all your credit cards (assuming you have multiple cards) is much worse. Fortunately, your credit score can recover as you pay down your balances, but first, you have to stop creating more debt.
2) It’s harder to get approved for other loans
Maxed out credit card balances could lead to you being denied a mortgage or loan.When you make an application 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. Mortgage lenders look at the percentage of your monthly income that’s used to pay debts. A high debt-to-income ratio could disqualify you from a mortgage.
3) You risk going over your credit limit
Even if you keep your balance just below your credit limit, you could still end up over your credit limit oncefinance chargesare applied to your balance. Once your balance goes over your credit limit, additional penalties can be applied, pushing you even further over your limit. Once your balance has exceeded your credit limit, it can be difficult to get it back down, especially if you’re making only the minimum payment each month.
4) The balance is harder to repay
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. Paying the minimum payment only lowers your balance a small amount each month because a large portion of your balance goes toward covering interest.
5) 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% or more depending on your credit card terms.A high interestrate 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.
6) 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.If you’re already having trouble sticking to a budget and making ends meet, a higher minimum payment will put even more strain on your finances.
7) Your credit card is no longer beneficial
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 leaves you without anyavailable credit that you can access for a purchase. You won’t be able to use your credit for an emergency or even to book a rental car or hotel. That’s when your credit card can truly feel like a burden.
So, in summary 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% 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.
FAQs
A maxed-out credit card can lead to declined purchases, impact your credit scores and increase your monthly credit card payments. You can deal with a maxed-out card by doing things like paying down the balance on your card and establishing a budget to help keep spending in check.
Why would having a credit card be a bad idea? ›
High interest rates
If you carry a balance on your credit card, you'll pay interest on that remaining money. And the interest will compound until the balance is paid off, which can get expensive quickly. “Paying less than the balance means high-interest charges.
Is it bad to max out a credit card and pay it off immediately? ›
Absolutely, while it's possible to max out your Credit Card and subsequently pay off the balance, it's generally ill-advised. Maxing out your card can lead to a high Credit Utilization Ratio, which may negatively impact your Credit Score.
Can you go to jail for maxing out credit cards? ›
Can You Be Imprisoned For Credit Card Debt? The short answer is NO. Debtors' prisons, as they were called in the past, no longer exist. According to the Fair Debt Collection Practices Act, collectors are prohibited from threatening prosecution or jail for credit card debt.
What happens if I use 90% of my credit card? ›
Helps keep Credit UtiliSation Ratio Low: If you have one single card and use 90% of the credit limit, it will naturally bring down the credit utilization score.
Is an 850 credit score good? ›
Your 850 FICO® Score is nearly perfect and will be seen as a sign of near-flawless credit management. Your likelihood of defaulting on your bills will be considered extremely low, and you can expect lenders to offer you their best deals, including the lowest-available interest rates.
What are 5 disadvantages of a credit card? ›
5 Disadvantages of Credit Cards
- High-Interest Rates. If you carry a balance on your card, the interest rate can be as high as 30% or more. ...
- Potential for Overspending. It's easy to get caught up in the moment when using a credit card instead of cash or a debit card. ...
- High Annual Fees. ...
- Hidden Costs. ...
- Credit Card Debt.
If you use a credit card, you're more like millionaires than you may think. Although most adults have credit cards, millionaires are even more likely to use them. According to the Federal Reserve, almost all adults with incomes over $100,000 have a credit card in their name.
What is one of the biggest dangers in using a credit card? ›
Interest charges. Perhaps the most obvious drawback of using a credit card is paying interest. Credit cards tend to charge high interest rates, which can drag you deeper and deeper in debt if you're not careful. The good news: Interest isn't inevitable.
What happens if I use 100% of my credit card? ›
Maxing out your credit card means you've reached your credit limit — and if you don't pay that balance off in full immediately, this can hurt your credit score and cost you significantly in interest.
Credit cycling is when you charge your credit card to its limit, pay the balance down, and then charge more within the same billing cycle. This can come in handy in certain situations, but isn't without its risks.
How much will my credit score drop if I max my credit card? ›
Your Credit Score May Drop
When you max out a card, your ratio is 100%. A ratio higher than 30% can decrease your score. For example, if you have a credit limit of $2,000, your balance should not exceed $600, which is 30% of your limit. Your available credit is 30% of your FICO score.
What percentage of people have maxed out credit cards? ›
Nearly one-fifth of Americans have 'maxed out' their credit cards as inflation and high interest rates push delinquencies to 3-year high. Credit card delinquency has been steadily rising since 2021.
What happens if a credit card company sues you and you can't pay? ›
You may lose the ability to dispute the debt, if you believe you don't owe it or that the amount is wrong, and depending on your situation and your state's laws, the creditor may be able to: Garnish your wages. Place a lien against your property. Move to freeze funds in your bank account.
What happens to unpaid credit card debt after 7 years? ›
Although the unpaid debt will go on your credit report and have a negative impact on your score, the good news is that it won't last forever. After seven years, unpaid credit card debt falls off your credit report. The debt doesn't vanish completely, but it'll no longer impact your credit score.
Is it OK to maximize your credit card? ›
No, experts say, if you handle your credit wisely, keep your credit line utilization ratio below 30%, and keep track of payment due dates. To improve your credit score, most credit experts recommend that you should avoid using more than 30% of your available credit per card at any given time.
Is it bad to use 80% of your credit card? ›
Using more than 30% of your available credit on your cards can hurt your credit score. The lower you can get your balance relative to your limit, the better for your score. (It's best to pay it off every month if you can.)
Is it okay to max out credit limit? ›
While spending over your credit limit may provide short-term relief, it can cause long-term financial issues, including fees, debt and damage to your credit score. You should avoid maxing out your card and spending anywhere near your credit limit. Best practice is to try to maintain a low credit utilization rate.
Is it bad to overload your credit card? ›
Being over your limit on one card could cost you 30 points or more—but only so long as it appears on your credit report. If you pay down the card, your score will recover once the card issuer reports the new balance.
