Here's What Happens When You Max Out Your Credit Card

Credit card debt can be sneaky. If you're not able to pay off your balance each month, it can creep up quickly. Before you know it, you've reached your limit -- also known as maxing out your credit card. The latest Transunion data reveals that American credit card balances remain at near record highs, showing many households are dependent on debt to stay afloat.

If you are close to your credit limit, here are four things that will happen when you max out your card.

1. You won't be able to spend any more

Your credit card limit is the amount you're able to spend. For example, if you have a limit of $3,000 on your card, transactions that take you over this level will likely be declined. Some issuers let customers opt in to over-limit protection programs, but this comes with a hefty fee and is only a short-term solution.

Generally speaking, once you max out your credit card, you won't be able to use it until you've paid down some of your balance. This leaves you with very limited wiggle room. If you don't have any savings and have to cover an unexpected cost, your card won't be an option.

2. Your credit score will suffer

There are a few different factors that go into calculating your credit score. An important one is credit utilization ratio -- the percentage of your available credit you're using. So if you have a credit limit of $3,000 and your balance is $500, your ratio would be 17%. If your balance is $2,999, your ratio would be almost 100%.

Most financial experts recommend you keep your utilization ratio under 30%. If it's close to 100%, it's going to drag your credit score down. A lower credit score will make it harder to borrow money, and may mean you pay a higher interest rate or your application is denied.

3. Your minimum payment will increase

Your minimum payment is usually calculated as a percentage of your balance. Depending on your card agreement, it can also be a percentage of your balance plus interest and fees. However it's calculated, as your balance increases, so will your minimum payment.

If you can't make the minimum payment on your card, this can also torpedo your credit score. Payment history is the most important criteria in your score, and even one late payment can have a dramatic impact. Plus, credit card issuers can increase your APR if you miss several payments, which would make life even more difficult.

4. You could pay a lot in interest

The average credit card APR is over 20%, according to the Federal Reserve. Most card issuers compound interest daily, based on your average daily balance. To illustrate with a simplified calculation: If your APY is 20% and your balance is $3,000, you could be accruing $1.64 in interest every day -- almost $50 a month. The difficulty with compound interest is that it adds up quickly as you're paying interest on your interest.

What to do if your credit card is maxed out

It's all very well to give you a laundry list of bad things that will happen if you max out your card. Unfortunately, in some cases, people max out their card because it's the least bad option available to them. Even so, if you've reached your credit limit, it's time to act.

Here are some steps to take:

• Pay down your balance as soon as you're able. Don't wait until the end of your billing cycle to make payments. If you have cash to bring your balance down, even a little, make the payment straight away.
• Take a hard look at your budget. If you're using your credit card to top up your income each month, see if there are any cuts you can make to bring your costs down. Look for any non-essential spending you can put on hold, as this could help you live within your means.
• Look for ways to increase your income. In the immediate term, you might look to sell unwanted items to raise some cash. Longer term, see if you can take on any extra hours at work or take on a side hustle to bring in more money. Put your increased earnings toward your credit card debt.
• Make a payment plan. There are a few different ways to pay down debt. What all of them have in common is that you work out how much you can put toward your debt each month and consistently pay it down. Check out our guide to getting out of credit card debt for more information.
• Consider debt consolidation. A debt consolidation loan can let you pay off multiple debts with one loan, sometimes lowering your APR along the way. Another route might be a balance transfer credit card with a low introductory APR. However, if your credit score isn't in the best shape, you might not get great terms.

You might also wonder about asking for an increase to your credit limit. This could be an option, but bear in mind that it is dependent on your credit score, which won't be as high as it could be because your card is maxed out.

Bottom line

Maxing out your credit card isn't ideal, but you can minimize the impact by keeping on top of your minimum payments and paying down your debt as quickly as you can. Not only will tackling your credit card balance give you more breathing room in terms of available cash, but it could also improve your credit score, which would give you more borrowing options.