4 Reasons Maxing Out Your Credit Cards Could Be a Major Disaster
Maxing out your credit cards could have more consequences than you imagined.
Maxing out your credit cards means that you charge up to the limit on the card. For example, if you have a $1,000 credit line and you charge $999 on the card, you've maxed it out. You've borrowed the maximum amount your card issuer will permit and don't have any more credit available.
There are some serious consequences associated with maxing out your cards. Here are four big reasons why you should avoid this to avert a potential financial disaster.
1. You won't have credit available if you need it
Credit cards ideally shouldn't be used as a substitute for an emergency fund. Ideally, you should have enough money in the bank to cover several months of living expenses in case any surprise costs arise.
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Unfortunately, many people don't live in an ideal world. You may not have cash saved for unexpected expenses, and surprise costs can still come up anyway. If that happens, not having any credit available on your cards could be a big problem. You could be forced into really expensive types of debt such as payday loans.
Keeping some credit available can help you avoid this -- although you should try to build up your emergency fund as soon as you can. Using credit cards to fund surprise costs can still be expensive, and the debt you acquire in this situation could make living within your means harder in the future since you'll have a monthly credit card bill to pay. For help figuring out how much to save for emergencies, use this emergency fund calculator.
2. You could end up going over the limit
If you've maxed out your cards, you don't have much margin for error. You could end up accidentally charging something that puts you over your credit limit. This is a breach of your card agreement that could result in added fees. You don't want to make your cards even more expensive by being charged an over-the-limit penalty.
3. You could damage your credit score
Your credit utilization ratio is a key determining factor in your credit score. It refers to the amount of credit you've used versus your total credit available, and it should be kept below 30% in order to avoid lowering your score. Ideally, it should be even lower than that if you want to maintain the strongest credit record possible.
Maxing out your credit cards would give you a credit ratio of 100% (or close to it if you're close to your credit limit). This could cause your credit score to drop, which can affect every aspect of your financial life. You could be denied a loan, have a landlord refuse to rent to you or require a larger security deposit, or get offered credit at only very high rates.
4. Paying back your debt could be really difficult
Obviously, the more you charge on your credit cards, the harder it will be to pay your balance in full -- especially because credit cards tend to have very high interest rates. If you've maxed out your cards, you may be unable to pay the balance off and could get stuck paying interest until you've brought the balance down to $0. The higher your balance is, the more of your money will go toward interest, and the more expensive and difficult it will be to become debt-free.
Now, sometimes you can't help maxing out your cards because you have expenses you need to charge. If that's the case, aim to make a plan for debt payoff ASAP. If you haven't already maxed out your cards, though, try to avoid doing so unless it's an absolute necessity. That way, you can spare yourself these four big downsides of charging up to your credit limit.
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