A maxed out credit card is a card that has a balance equal to or higher than the credit limit. Maxing out your credit card can cause credit score damage, as credit utilization – the ratio between your credit limit and statement balance – is an important factor in determining your credit score.
There are no direct costs associated with maxing out your credit card, but you won’t be able to use your card until you make a payment and increase your available credit. Maxing out your credit card can also signal to lenders that you are a risky candidate to borrow, making it harder to get approved and leading to less favorable terms.
What Happens When You Max Out Your Credit Card?
You Won’t Be Able to Make New Purchases
Once you hit that wall, only a payment or an increase in your credit limit will enable you to make purchases with your plastic moving forward. This can put you in quite the predicament if you aren’t prepared. This is actually one of the reasons we do not recommend No Preset Spending Limit credit cards, whose spending limits are determined on a monthly basis and are not communicated to the user.
Your Credit Score Will Go Down
Your credit card issuer will relay news of your maxed out status to the major credit bureaus in the course of its normal monthly account information update. This information will then be incorporated into your credit files and thus factored into your resulting credit scores.
This, of course, assumes that you do not make a payment prior to the end of your monthly billing cycle. If you do so, you’ll minimize any resulting credit damage since the only balance that gets communicated to the credit bureaus is what remains when your monthly statement is generated. If you don’t, interest will apply to your average daily balance – which can become quite expensive.
Your Interest Rate Will Increase
Depending on the issuer, maxing out your card may trigger the penalty APR (at least for future transactions). Considering the average penalty rate is currently 26.19%, that could potentially make future transactions very costly.
To learn more, check out WalletHub’s guide on what happens if you go over your credit limit.
What to Do After Maxing Out a Credit Card
- Pay Your Bill - This will restore your spending power and potentially prevent your utilization ratio from being reported to the credit bureaus as 100%, depending on when you pay and when your billing period ends.
- Check Scheduled Payments - Depending on when you hit your monthly limit, there’s a chance that any payments you had scheduled to be made from your credit card account – rent, Netflix, Spotify, etc. – might not have gone through. It’s thus a good idea to double check your status in order to avoid service interruptions and late fees.
How to Avoid Maxing Out Your Credit Card
- Ask For a Higher Limit: This will enable you to supplement your spending power and reduce your per-card credit utilization. Remember, secured card users can simply add to their deposits to increase their spending power.
- Adjust Your Plan: A maxed out credit card can easily sneak up on someone, especially those who are relatively new to credit and thus have low credit lines. Three-to-five hundred dollars can go very quickly these days, so planning is essential.
You need to start each month with a clear idea of how much credit you have available as well as how much cash you can afford to spend, and then carefully allocate these funds to necessities like food, health insurance and rent payments.
- Pay More Than Once: There’s no reason not to submit multiple monthly payments. This will enable you to keep utilization consistently low, avoid missed payments and recognize dangerously high spending patterns.
- Keep Track of What You Buy: Keeping a running tab of your recent expenses will enable you to foresee a potential maxed out card and plan accordingly.
- Use Cash: While using cash means forfeiting potential rewards earnings and essentially subsidizing the purchases of card users, it can be helpful in the face of a low credit limit or if you’ve run into trouble with overspending in the past. Reevaluating whether certain automatic monthly payments need to be made with plastic will also be beneficial.
- Apply for a New Credit Card: If you have enough money to afford higher monthly credit card bills but your current card’s issuer won’t give you a credit limit increase, you could consider applying for a new card to spread your monthly expenses across two accounts and keep your utilization down on each.
When It Makes Sense to Max Out a Credit Card
While it would be easy to take a hard line and say that maxing out your credit card is never, ever a good idea, we at WalletHub live in the real world. We recognize there are certain situations when maxing out your plastic may actually be beneficial, especially if you do not have anything like a car or house purchase coming up. There’s no reason to obsess over your credit score if no one will be checking it for the foreseeable future.
It might make sense to max out your credit card if you:
- Have Very Low Credit Limits: Credit card newcomers have almost no choice but to max out their credit cards if they have a spending limit of only a few hundred dollars and rely on plastic for everyday purchases.
- Face True Emergencies: You shouldn’t give a thought to credit utilization in the face of a true financial emergency, such as a medical emergency, repairs to your ride to work, or legal services.
- Consolidate Debt: The rise of introductory 0% credit card rates has made it quite popular to transfer debt from a high-cost loan or line of credit in order to save on finance charges and pay down the principal faster. For example, the average household could save about $1,800 over a two-year-period on their roughly $9,000 credit card balance by transferring it to one of the best offers on the market. If you’re able to use a 0% rate to pay down your debt faster, temporarily high credit utilization should be an easy pill to swallow.
A credit card calculator will help you figure out how much to pay every month in order to become debt free. It can also help you find a credit card that will maximize your savings.
- Can Get Valuable Rewards: Credit card companies have also been offering extremely lucrative initial rewards bonuses. For instance, the best rewards cards on the market offer $400+ bonuses to new customers who spend at least $3,000 in the first three months their accounts are open. Such value is likely worth having a maxed-out credit card for a few months.
Ask The Experts: Taking It to the Max
For more insights into the inner-workings of the credit card industry, including how to avoid and deal with maxed out credit cards, we posed the following questions to a panel of leading personal finance experts. You can check out their bios and responses below.
- What other financial difficulties might a maxed out credit card signify?
- Where would you rank a maxed out credit card in the pantheon of consumer financial mistakes?
- What is the best way to deal with a maxed out credit card?
- Are maxed out credit cards less worrisome for students and people with damaged credit who might not have high credit lines to begin with?