by Lyle Daly | Updated July 21, 2021 - First published on July 1, 2019
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A maxed-out credit card may seem synonymous with overspending, but that's not always the case.Image source: Getty Images.
Have you ever maxed out a credit card? Based on the statistics, there's about a 50-50 chance that the answer is yes.
That may seem alarming, especially given that using up all your available credit is widely seen as a big financial blunder. Experts advise using as little of your credit as possible, and thus maxing out a card would seem to be the definition of overspending.
But believe it or not, there are times when a maxed-out credit card isn't a big deal. In fact, I maxed out one of my cards last month, and it made zero impact on my credit score. Here's what you need to know about maxing out a credit card and when it is, and is not, a problem.
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According to our study on American credit card habits, almost 52% of consumers have maxed out a credit card. To clarify, that means they had used their entire credit limit on a card at least once.
Age seemed to play a factor in how likely a consumer was to have maxed out a card, but it wasn't the much-maligned millennials who were at the bottom of the pack. Here are the numbers on how many people in each generation had maxed out a credit card:
There are several ways in which maxing out a credit card could have an impact on your life. Here are the most common negative ramifications.
Credit card debt. It's hardly ever a good idea to carry a balance on a credit card (unless the card has a 0% intro APR). The more you charge, the more likely it is that you'll fail to pay your balance in full by the due date -- and thus wind up paying interest. If you max out a card with a high credit limit, you could be paying off that balance for months or years to come.
A lower credit score. 30% of your FICO® score calculation is based on your credit utilization, which is the ratio of your credit card balances to your total available credit. If your total available credit is $10,000, and you owe $2,000 altogether, then your credit utilization ratio is 20%. If this number gets too high -- above 30% or so -- it can drop your credit score considerably. A maxed-out credit card could cause you to have very high credit utilization, although this will depend on how many credit cards you have and the total limit you have available.
Being unable to use your card. Once you've maxed out a credit card, you can't use it anymore until you pay down the balance. That could be inconvenient for you, as you'll need to find another payment method for the time being. And if you're using one of the top credit cards to earn cash back or travel rewards, you'll be missing out on those rewards until you can use the card again.
A maxed-out credit card doesn't always mean you're doing something wrong. If you can pay the card off in full without paying any interest, and if you can keep your credit utilization low because you have multiple credit cards, then you don't need to worry about maxing out one card.
Why would you want to max out a card, though? Here are a few of the more common reasons:
I found myself in the last scenario. I had to hit a spending minimum to earn a sign-up bonus on a new card, but the card issuer gave me a credit limit of just $2,000. I ended up maxing out the card to earn the bonus. Since this was only one of more than a dozen credit cards that I have, maxing out that card barely changed my credit utilization, and my credit score stayed the same.
The key here is having enough available credit that maxing out one card won't push your credit utilization past 30%. And of course, you still need to pay off the balance before you get hit with any interest charges.
In most situations, you should try to avoid maxing out any of your credit cards. Your credit score could take a big hit, and it's easy to get stuck with credit card debt from spending too much.
At the same time, maxing out a credit card isn't always something you need to avoid. There are occasional exceptions where you may have a valid reason for using up an entire line of credit.
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