This Is the Worst Time to Max Out Your Credit Cards
Don't make a costly mistake at just the wrong time.
As a general rule, it is a bad idea to max out your credit cards. If you have a credit card with a $5,000 credit limit and you charge $4,900 or $5,000 on the card, you've maxed it out.
While maxing out your cards is never a good thing, there is one time when it can be especially damaging.
Don't ever max out your cards in this situation
If you are applying for a big loan -- like a mortgage loan, a personal loan, or a car loan -- do everything you can to avoid getting close to your credit limit.
Featured offer: save money while you pay off debt with one of these top-rated balance transfer credit cards
There are a few big reasons maxing out your cards then is particularly bad news. You could get denied for your loan, and be unable to buy that house or car or get your funds, because maxing out your cards lowers your credit score. If you use more than 30% of your credit limit, it hurts your score. And the closer you get to maxing out your cards, the worse the damage. If your credit score is lower because you've charged too much on your cards, you also may not qualify with as many lenders.
Lenders compare your amount of debt and monthly debt payments to your income. This is called your debt-to-income ratio. If you've maxed out your cards, you have more debt and a higher monthly payment. If your debt-to-income ratio is too high, lenders may deny you money.
Even if lenders don't deny your loan due solely to maxed-out cards, they may view you as a riskier borrower because of a higher debt-to-income ratio and lower credit score. Since you're borrowing a lot of money for years -- possibly decades -- even if they raise your interest rate only a little bit, you could be stuck with thousands or tens of thousands of dollars in extra interest costs.
And, of course, if you max out your cards, it's harder to make payments on your cards and the new loan you're taking out, which increases your risk of default.
Because of all these downsides, avoid getting close to your credit limit if a large loan is in your immediate future.
Alert: our top-rated cash back card now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
Related Articles
View All Articles