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This Is What Happens When You Max Out Your Credit Card...June 30, 2020
If you use a credit card, you already know that the instrument has a credit limit – or in other words, there is a limit to the amount you can charge using that credit card.
When your credit card balance is near (or over) the credit limit, it is said to be “maxed out.”
So, if your credit limit is $2,000, and you have made purchases worth $2,000 using that card, it would mean that you have maxed out that card.
Now, if you want to make any additional purchases using that card, you’ll need to first free up some of your available limit by paying down the existing balance.
What are the consequences of maxing out your credit card?
Just because you have been allotted a certain limit on your card, doesn’t mean you can use up all of it every single time.
This is because when you max out your credit card:
- Your credit scores may take a hit: An important component of your credit score is your credit utilization ratio.
This measures the proportion of used credit to available credit and determines about 30% of your score.
Experts recommend that you keep this ratio below 10% at all times.
Anytime this ratio exceeds 30%, your score may suffer, and you could have difficulty obtaining credit on favorable terms.
Maxing out your credit card means your credit utilization has reached 100%, which can be extremely detrimental to your score.
- Your account may be closed: If you get into the habit of maxing out your card, your issuer may take it as a sign of financial trouble and therefore close your account (unfortunately, in this case you’ll still need to pay back your existing balance).
If you face such a situation, it’s advisable to quickly pay down at least part of your existing balance and make a request to the card company to reinstate your account.
- You might have to pay the penalty rate: A maxed out credit card is characteristic of consumers who have used their card to spend more than they can afford – such individuals often end up making their credit card payments late.
If your card payment is more than 60 days late, your issuer may hit you with the penalty APR which can be as high as 30%, for a period of at least 6 months.
One way to avoid the penalty rate is to set up automatic payments for at least the minimum amount due on your credit card each month.
When is it okay to max out your credit card?
If you are facing an emergency (say your vehicle has broken down in the middle of the highway) or you are facing a long stretch of unemployment, then it may be okay (or even unavoidable) to max out your credit card.
However, make sure you pay down the balance at the earliest available opportunity.
In certain situations, you can max out your card if you are planning to rack up reward points – as long as you pay it off before the end of the month, of course.
Finally, while using a balance transfer to consolidate your debt, you can max out your card – however, make sure you stick to your repayment schedule and pay off the entire balance before the introductory period is over.
How to avoid maxing out your credit card?
If you find yourself maxing out your credit card at the end of each month, then it can make sense to request the issuer for a credit limit increase.
A credit limit increase, if granted, will ensure that your credit utilization remains lower, provided you don’t increase your spending.
You can also set up alerts that inform you when you are nearing your credit limit, so you can make a stop to further purchases and concentrate on paying down the balance instead.
Finally, make a conscious effort to monitor balances at regular intervals so you can ensure that your credit cards are never maxed out.
Many consumers treat credit cards as a source of temporary funds, and therefore max out their cards for various purposes, for example, financing their business.
However, as discussed above, this action can have negative consequences.
A better approach would be to contact our team at Fund&Grow.
We offer individuals, with good credit, the option to obtain $50,000 - $250,000 of unsecured credit at 0% interest through creative credit card financing.
Available for a period of 6, 12, or 18 months, this amount can be used for anything from funding a small business to providing a down payment on a property.
So, if you need help in this regard, call us at (800) 996-0270 and we will help you deal with your financing problems.