by Christy Bieber | Updated Sept. 22, 2021 - First published on Aug. 14, 2019
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Maxing out your credit cards can hurt you in a number of ways. Here are a few key reasons you don’t want to max out your cards.
Credit cards come with credit limits, or maximum spending limits. For some card users, that limit is seen as a ceiling, and charging all the way up to it seems like an OK idea. Unfortunately, if you’re one of those card users, you could be damaging your finances by maxing out your card.
How does maxing out your card hurt you? There are actually a number of surprising ways that charging too much on your card can have an adverse impact on your financial situation.
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Your credit score can impact your ability to borrow money, rent an apartment, get a cellphone, or do business with many companies. Lenders, landlords, and companies often check your credit as a means of determining whether you will be responsible and trustworthy in doing business with them.
Unfortunately, if you max out your credit cards, your credit score can take a big hit. That’s because your credit utilization ratio is one of the most important factors considered when your score is calculated. Credit utilization ratio is calculated by dividing the outstanding balance owed by the maximum credit available to you on each card. If you owe $2,000 on a card with a $10,000 credit line, you’d divide $2,000 by $10,000 to get a 20% utilization ratio.
Your credit utilization ratio needs to be as low as possible, and definitely below 30% to avoid hurting your credit score. But, if you’ve maxed out your cards, this won’t happen. If you’re using $10,000 of your available $10,000 credit limit, your utilization ratio is 100% and your credit score will be much lower because of it.
If you exceed your credit limit, many credit card issuers will charge a fee. And if you violate your cardmember agreement by going over the limit, you may be charged a penalty APR. Your penalty APR can be as high as 29.99%, which is likely significantly higher than your standard interest rate. If your interest rate jumps up, it will make your debt much more expensive to pay.
Unfortunately, if your credit cards are maxed out, you’re hovering near that limit. If you underestimate your spending by just a small amount, or your card is hit with a recurring charge at the wrong time, it could push you over the limit, triggering the fees and the huge APR jump.
When you owe a lot of debt on your credit cards, this increases your required monthly payment. When you apply for other loans, such as a home loan, lenders often look at how your monthly income compares to your monthly debt obligations. This is called your debt-to-income (DTI) ratio.
If your DTI ratio is too high, you may not be allowed to borrow any more money, or may be limited to high-interest loans with unfavorable terms because lenders view you as a big credit risk. This means you could end up unable to buy a home or go back to school just because this maxed out card is making your DTI too high.
Sometimes, emergencies arise that you just don’t have the cash to cover. And although it’s best to have an emergency fund so you don’t go into debt in these situations, that isn’t always possible for everyone. If you have no emergency fund but have credit available on your cards, you could at least turn to those cards to pay the bills necessary to handle the emergency.
If you have no credit available because your cards are maxed out, this won’t be an option. You could end up feeling like you have no choice but to use very high-interest debt, such as payday-loan debt or a car-title-loan debt, just because you’ve already used up the credit open to you on your cards.
As you can see, maxing out your credit card can be a very bad idea. In fact, you should aim to keep your card balance below 30% of your available credit at most. To make sure you don’t charge too much, keep your spending limit in mind, and pay down your debt ASAP.
If you’ve already maxed out your card, you may want to consider a balance transfer offer to help you get out of debt faster -- or simply work on making extra payments so you can get that balance down to a reasonable level. Your credit and DTI ratio will be better once you do, and you’ll have credit available if and when you really need it.
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