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Few things are as embarrassing as having your credit card declined by a cashier in front of a line of impatient customers. But does maxing out a credit card hurt your credit score as well as your ego?
Yes, maxing out credit cards can hurt your credit score. However, the impact to your credit from a maxed-out credit card will depend on many factors. This guide explains how -- and why -- maxing out credit cards impacts your credit score.
Unfortunately, people who regularly utilize their full credit limit are less likely to repay their debts than those who use a smaller percentage of their limit. For this reason, maxing out your credit card is considered a risky move -- and risky moves generally result in a lower credit 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 for every cardholder. Instead, your credit score is affected by the balances of your credit cards relative to your credit limits. The ratio of the two amounts 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% (about one-third) of your available credit. Around the 5% to 10% range is even better.
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, and it is worth 30% of your credit score. If you have a maxed-out credit card, you're using 100% of your available credit for that account. Depending on the rest of your credit report, this can be devastating. It's not uncommon for a maxed-out credit card to drop a credit score by up to 45 points.
While maxing out credit cards will decrease your credit score, how much your score drops will depend mostly on how many other credit cards you have -- 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 hit? 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 an excellent score would typically see a bigger credit score drop from maxing out a credit card than someone who has bad credit.
The potential for damaging your credit with a maxed-out credit card increases the longer your card balance stays high. For instance, if you carry the balance beyond your due date, you'll start to be charged credit card interest. And yes, that interest collects above and beyond your credit limit.
Unless you pay off the card, you could find yourself under a mountain of credit card debt and spiraling interest. This not only continues to degrade your score through a rising utilization rate, but your chance of falling behind on your payments can also rise along with your balance and fees. Your payment history is 35% of your FICO® Score, and even one late payment can have devastating effects.
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 a necessary expense, such as a medical emergency, you might need to max out a credit card -- and that's okay. (Note: If you're currently facing high medical bills, you might benefit from our guide to financing medical expenses.)
You may also consider maxing out a credit card during a balance transfer to take advantage of a low interest rate. In this case, the potential credit damage from a maxed-out credit card is tempered by the savings from the reduced APR.
Imagine that you have five credit cards, each with a $2,000 balance and an 18% interest rate. Let's say you get a new credit card with a $10,000 limit and a 0% intro APR on balance transfers for 18 months. You could transfer all of your existing balances and pay no interest while you work on paying off debt.
Another situation in which maxing out credit cards can be worthwhile is when you can earn sizable rewards. If you have a major purchase coming up and you're looking to meet a sign-up bonus requirement, for instance, putting a large purchase or two on one card can actually pay off. Admittedly, this is only a good idea if you can pay off the purchases quickly to avoid interest fees.
Maxing out a credit card could make sense in some circumstances, but more often than not it's a bad idea. Depending on your credit profile, the damage to your score from a maxed-out credit card can be severe.
However, you don't need to fear that damage from a maxed-out credit card will haunt you for life. On the contrary, while maxing out credit cards can certainly cause significant credit damage, that damage only lasts as long as your high balance does. That is to say, if you pay down the balance on the maxed-out credit card, your credit score will recover as soon as the lower balance is reported to the credit bureaus.
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