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If you’re trying to get a handle on credit and finances, it’s essential to understand what maxing out a credit card actually means. With terms like “credit utilization” and “APR” often tossed around, it can feel a bit overwhelming. But don’t worry – this guide will break down exactly what happens when you max out your credit card, along with common myths and misunderstandings, so you can avoid financial pitfalls and keep your credit in good shape.
What does It mean to 'max out a credit card'?
Maxing out a credit card means you’ve reached the card’s spending limit. For example, if your credit card has a $2,000 limit and you’ve charged $2,000 in purchases, you’ve maxed it out. While that doesn’t necessarily mean you’ve missed a payment, it does mean your card is fully utilized – and this can have a range of impacts on your financial health.
Common myths about maxing out your credit card
Before diving into the consequences, let’s clear up a few common myths about maxing out a credit card. There’s a lot of misinformation out there, and knowing the facts can help you make smarter financial decisions.
Myth #1: “It’s okay to max out my card if I pay it off in full”
Fact: While paying off your balance in full each month is a good habit, maxing out your card can still hurt your credit score in the short term. Credit utilization, which is how much of your available credit you’re using, makes up a significant portion of your credit score. Lenders like to see that you’re using less than 30% of your available credit. Maxing out your card – even if you plan to pay it off right away – can temporarily lower your score.
You can see this in action when using various credit monitoring tools. You may notice that a decrease in your score is tied to a message such as the following: “Credit usage: Went up from 20% to 40%.”
Myth #2: “Maxing out just one card isn’t a big deal”
Fact: While maxing out one card may not seem like a huge issue, it signals to lenders that you’re relying heavily on credit. If you’re ever in a situation where you need to apply for a loan or a new credit card, a high balance on even one card can make you appear riskier to lenders.
Let’s say you’re a loan officer working for a bank. Are you more likely to grant a loan to someone who says they have been diligently saving up for a home for the last 15 years and can put down 25% in cash, or are you more likely to sell to someone who has a maxed-out credit card and needs a massive mortgage? You want to paint the picture to future lenders that you are capable of living within your means.
Myth #3: “If I don’t go over the limit, I’m fine”
Fact: You don’t need to go over the limit to see negative consequences. Even reaching close to the limit can affect your credit score, incur additional fees, or result in a credit limit reduction if the credit card issuer feels you’re overextending yourself financially.
Common consequences of maxing out your credit card
Now that we’ve cleared up some misconceptions, let’s discuss the real consequences of maxing out your credit card.
1. Credit score drop
Credit utilization ratio, which is the percentage of your available credit that you’re using, has a big impact on your credit score. The lower your utilization, the better – ideally below 30%. So, if your credit card limit is $10,000, you want to keep your credit card spending to $3,000 or less.
When you max out your credit card, your utilization jumps to 100%, which can cause a significant drop in your credit score. This can impact your ability to qualify for loans, get new credit cards, or secure favorable interest rates.
2. Higher interest costs
If you carry a balance on a maxed-out card, you’re likely paying high-interest rates on that balance, especially if your card’s APR is high. With a maxed-out card, your balance grows faster due to interest, and a larger portion of your payments will go toward interest rather than reducing the principal amount.
Here’s an example:
Let’s say your balance is $5,000. With the minimum payment set at 3% of the balance, your monthly minimum payment would start at $150 (i.e. 3% of $5,000).
Month 1:
- Starting Balance: $5,000
- Interest Charged: $100
- Minimum Payment (3% of Balance): $150
- Amount Applied to Principal: $150 - $100 = $50
After making the $150 payment, your balance reduces only slightly because a large portion of the payment, or $100 out of your $150 payment, went to interest. Meanwhile, only $50 out of $150 went towards the principal.
- New Balance After Month 1: $5,000 - $50 = $4,950
Month 2:
- Starting Balance: $4,950
- Interest Charged (2%): $99
- Minimum Payment: $150
- Amount Applied to Principal: $150 - $99 = $51
- New Balance After Month 2: $4,950 - $51 = $4,899
If you continue to pay only the minimum each month, the balance will decrease very slowly due to high interest charges. In this case, it would take years to pay off the debt completely, and you’d end up paying significantly more than the original $5,000.
For example, over the course of several years, you could pay close to double the original balance in interest payments alone.
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3. Possible credit limit reductions
Credit card issuers periodically review your accounts, and if they see that you’re maxing out your card often or struggling to pay down the balance, they may lower your credit limit. This can be frustrating and can further hurt your credit utilization rate if you’re relying on that credit limit for flexibility.
4. Reduced access to new credit
When you apply for a new loan or credit card, lenders review your credit report, and a maxed-out card signals financial risk. Lenders want to know that you can responsibly manage your current credit before giving you more. A maxed-out card could lead to higher interest rates or denials for new credit.
If you’re saving up for a new home, the ability to obtain a mortgage could be drastically impacted by your credit utilization rate and score.
5. Risk of over-limit fees and penalty APRs
If your card allows you to go over the limit, you may be hit with an over-limit fee, which adds to your balance and your total debt. Additionally, maxing out your card could lead to a penalty APR if you miss a payment or consistently carry high balances. This is a higher interest rate applied to accounts seen as higher risk, and it makes it even more challenging to pay down your debt.
Bankrate has a great article and tip on key numbers to remember regarding APR. You want to remember 3 key numbers: 21, 45, and 60. It states:
“21: By law, issuers must give you at least 21 days from when your statement is generated at the end of a billing cycle to your payment due date. In most cases, that stretch is also an interest-free grace period, but that isn’t mandated by law.
45: Federal law requires the issuer to give you 45 days’ notice before applying a penalty APR. The notice should include the penalty rate and the reason for the penalty.
60: The penalty APR generally comes into play only after you’ve failed to make a payment for at least 60 days.”
Tips to avoid maxing out your credit card
While the consequences may seem serious, you can take simple steps to avoid maxing out your card and protect your financial health.
1. Track your spending regularly
It’s easy to overspend if you’re not keeping tabs on your purchases. Use your credit card app to check your balance frequently so you know how much credit you’ve used and how close you are to the limit.
You can also use free tools like Google Spreadsheets, which is what I use with my household. For more tips, check out our article on “How to Limit and Avoid Credit Card Debit.”
2. Set up alerts and automatic payments
Many credit card issuers allow you to set alerts for when you reach a certain balance. You can also set up automatic payments to ensure you’re paying at least the minimum balance on time every month.
3. Aim to use less than 30% of your credit limit
As previously mentioned, using less than 30% of your credit limit is ideal for maintaining a good credit score. If you have a $10,000 limit, aim to keep your balance under $3,000.
4. Increase your credit limit responsibly
If you have a good payment history, consider asking your credit card issuer for a credit limit increase. This can improve your credit utilization ratio, but be careful not to view it as an invitation to spend more.
Maxing out your credit card may seem like a minor issue at first. However, the consequences can be long-lasting and affect everything from your credit score to your ability to get approved for future loans. By understanding how credit utilization works and staying mindful of your spending, you can use credit to your advantage – without falling into debt traps.
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The content on this blog is for general information purposes only, and is not intended to be personal financial advice. It does not take your individual circumstances and financial situation into account, and any reliance you place on the information is at your own risk.
