by Christy Bieber | Aug. 1, 2019
According to a recent study conducted by The Ascent, more than half of Americans reported they have maxed out their credit cards. In fact, a total of 52% of Americans reported having hit their card limit, including 50.3% of millennials, 58.8% of Gen Xers, and 39.3% of baby boomers. While maxed out cards are a problem that spans all generations, Gen Xers were the most likely to report reaching their credit limit.
Maxing out credit means spending up to the card's credit limit -- so if your card has $5,000 in available credit, you'd run up $5,000 worth of charges. This could happen all at once if you make a very expensive purchase. Or it could happen over time if you regularly use the card and don't pay off all you owe, causing the balance to compound and grow.
Maxing out cards is common. But it's also bad news and should be avoided at all costs.
Maxing out your credit cards is a bad idea for obvious reasons: If you charge a fortune on your cards, chances are good you won't be able to pay off the total balance when the bill comes. And if you can't pay off your balance in full, you're going to pay interest.
Interest adds to your expenses and makes debt payoff harder. The more of your money going to interest, the less you have for other things. The interest rate on credit cards tends to be higher than that on other types of debt like car and personal loans. When you run up a big balance at a high interest rate, it can be hard to become debt-free again.
Maxing out your cards is also a bad plan because you could hurt your credit score. One of the most important factors that determines your credit score is your credit utilization ratio. This is calculated by dividing the credit you've used by the credit available. If you've charged $3,000 on a card with a $10,000 limit, you have a 30% credit utilization ratio.
If your credit utilization ratio exceeds 30%, your credit score will be lower because of it. Maxing out your cards is particularly damaging to your credit, as it can make future lenders nervous that you can't control your spending. This could mean you won't be approved for loans as easily. And if you do get approved, you could end up being charged a higher interest rate.
If you've maxed out your cards, you should make a plan to pay off what you owe ASAP. Ideally, you can make extra payments to pay down the balance more quickly.
Because you're probably paying a lot of interest with maxed out cards, you may also want to look into a balance transfer. This would involve finding a credit card offering a 0% promotional APR on transferred balances.
You could move some or all of your debt to the new card to avoid paying interest during the promotional period. Since more of your money would go toward principal, it would be easier to become debt-free.
Just be sure you're committed to making payments and not charging up your other cards once you free up your credit. Remember that if you don't pay off the balance due before the promotional rate expires, your interest rate could go up.
Asking for a credit line increase could also help to reduce the damage of a maxed out card. After all, if your credit line is bigger, you wouldn't be maxed out anymore. The Ascent found 33% of Americans were planning to ask for a credit limit increase next year, so this may be a common strategy. But again, you need to be sure not to max out the new limit -- and there's no guarantee your card issuer will increase your credit line.
If you're among the majority of Americans who have maxed out your credit cards, it's easy to see why this is a bad idea and why you shouldn't do it again.
If your cards are still maxed out, start working on getting that debt paid down ASAP to improve your credit score and reduce the interest you're paying. It takes effort, but your financial life will be better once you're no longer at your credit card limit.
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