Published in: Credit Cards | July 28, 2019

Does Maxing Out a Credit Card Hurt Your Credit Score?

Maxing out a credit card can hurt your credit score, but the impact can vary significantly.

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Maxing out a credit card can hurt your credit score, but just how much damage will it do? Like most personal finance topics, there’s a lot to the story. The impact on your credit score depends on your other financial circumstances. Not just on the maxed-out credit card itself.

With that in mind, here’s a quick guide to why maxing out a credit card can be such a problem. Let’s see what impact a maxed-out credit card could have on your score.

Why does maxing out a credit card usually hurt your credit score?

It might seem like maxing out a credit card wouldn’t have much of an impact on your credit score as long as you pay it on time. After all, doesn’t borrowing money and paying on time demonstrate responsible credit behavior?

Nobody disputes that on-time payment is financially responsible. But every major credit scoring formula frowns upon maxing out credit cards. Studies show that people who utilize their full credit limit are less likely to be able to repay their debts than those who use a smaller percentage of their limit.

There are five distinct categories of information that make up your FICO credit score. The amount of debt you have is the second most important factor in your FICO Score. It’s just behind your payment history and makes up 30% of the information used to calculate your score.

But it’s not the dollar amount of your debts that matter. A $2,000 credit card balance isn’t necessarily worse than a $1,000 credit card balance. Instead, the formula focuses on the balances of your credit cards relative to your credit limits.

It also includes the amounts you owe on your installment loans like mortgages and auto loans relative to their original balances. This is called your utilization ratio.

To maintain a good credit score, aim to keep the utilization of your revolving credit lines, like your credit cards, under 30% of your available credit. If you have a $5,000 credit limit, try to keep your balance under $1,500. Lower utilization percentages are even better.

The average person with a FICO Score between 750 and 799 uses 10% of their available credit. The average person in the 800-and-above tier uses just 4%.

If you max out a credit card, you’re using 100% of your available credit. Since your credit utilization is a major factor in your credit score, this can be devastating. It’s not uncommon for a maxed-out credit card to drop a credit score by up to 45 points. The drop could also be as low as 10.

Other factors that come into play

This is a wide range. The reason for this is that everyone’s credit situation is different and there are a few factors that determine the impact a maxed-out credit card has on your score.

The biggest factor is your other credit cards, if you have any, and their balances.

Let’s say you have 10 credit cards with a combined credit limit of $40,000 and no outstanding balances. If you max out one with a $2,000 limit, even though you’ve maxed out the card, you’re still only using 5% of your total available credit. Will your score take a hit? Probably. Will it be a big one? Probably not.

On the other hand, if you max out your only credit card, or if your other credit cards also have high balances, the impact on your score could be far greater. If you have only one credit card with a $5,000 limit and you spend $4,900 on the card, you’ll probably notice a significant drop in your score as soon as the balance is updated with the credit bureaus.

Another major factor is how your credit score stood before you maxed out a card. FICO gives the general guidance that the higher a consumer’s credit score was to begin with, the more dramatic the impact of bad credit behavior will be.

In other words, someone who has a FICO Score of 800 would see a bigger credit score drop from maxing out a credit card than someone who has a FICO Score of 650.

Is maxing out a credit card ever a good idea?

Maxing out a credit card is rarely a good financial move, but there are a few exceptions. If you have no other way to pay an expense, it can be a good idea. For example, maxing out a credit card is better than not getting a medical procedure you need.

Balance transfers can also help. Let’s say that you have five credit cards, each with a $2,000 balance and an 18% interest rate. You get a new credit card with a $10,000 limit and a 0% APR on balance transfers for 18 months and transfer all of your existing balances.

Now you’re maxing out the new credit card and your score might get dinged. However, you’ll also be saving $1,800 per year in interest charges. That might be worth taking the hit.

It’s smart to look at alternatives

Maxing out a credit card could make sense in some circumstances, and it’s important to know what to expect before you do. If you need to make a major purchase, there could be better ways to go.

For example, you might be able to get a personal loan with a significantly lower interest rate than your credit cards. Installment debts are typically better for your score than a maxed-out credit card, too. Explore your options to avoid taking a big credit score hit.

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