Credit cards can be convenient and often offer perks and discounts that aren’t available when paying by cash. But there can also be pitfalls, a prime example being maxing out the card to its spending limit. Here are seven reasons why this should be avoided if at all possible.
1) Your credit score can drop
A large part of your credit score (circa 30%) is based on how much of your available credit you’re using (this ratio of credit balances to credit limits is known as your credit utilisation). The higher your credit utilisation, or the closer your credit card balances are to your credit limit, the more your credit score is hurt.
Maxing out one credit card is pretty bad for your credit score. Maxing out all your credit cards (assuming you have multiple cards) is much worse. Fortunately, your credit score can recover as you pay down your balances, but first, you have to stop creating more debt.
2) It’s harder to get approved for other loans
Maxed out credit card balances could lead to you being denied a mortgage or loan. When you make an application for a loan, the bank will check to see how much of your available credit you’re using. If your credit card balances are too high, banks take that as a sign you already have more debt than you can handle. Mortgage lenders look at the percentage of your monthly income that’s used to pay debts. A high debt-to-income ratio could disqualify you from a mortgage.
3) You risk going over your credit limit
Even if you keep your balance just below your credit limit, you could still end up over your credit limit once finance charges are applied to your balance. Once your balance goes over your credit limit, additional penalties can be applied, pushing you even further over your limit. Once your balance has exceeded your credit limit, it can be difficult to get it back down, especially if you’re making only the minimum payment each month.
4) The balance is harder to repay
Depending on your credit limit, a maxed-out credit card balance could take years to repay, particularly if you make only the minimum payment each month. You may plan to pay the balance in full, but other unexpected expenses might make that too difficult to do as the payment due date approaches. Paying the minimum payment only lowers your balance a small amount each month because a large portion of your balance goes toward covering interest.
5) You could trigger the penalty rate
Credit card companies have the right to raise your credit card interest rate if you default on your credit card terms by exceeding your credit limit. The penalty rate is the highest interest your credit card company can charge and could be 30% or more depending on your credit card terms.A high interest rate applied to a high balance can be disastrous because it might mean you are making large monthly payments that are being applied only to interest and not lowering your balance.
6) The minimum payment is higher
Your credit card’s minimum payment is based on the size of your credit card balance. As your balance increases, so do your monthly minimum payments. Maxing out your credit card increases the amount you’re required to pay each month.If you’re already having trouble sticking to a budget and making ends meet, a higher minimum payment will put even more strain on your finances.
7) Your credit card is no longer beneficial
One of the reasons for getting a credit card is to have access to credit when you need it. However, maxing out your credit card leaves you without any available credit that you can access for a purchase. You won’t be able to use your credit for an emergency or even to book a rental car or hotel. That’s when your credit card can truly feel like a burden.
So, in summary it’s best to keep your credit card balance low enough that you can afford to pay it off each month, keeping in mind that any balance higher than 30% can have a negative impact on your credit score. To avoid maxing out your credit card by mistake, check your credit limit before making a credit card purchase.