Maxing out a credit card means you have used all of your available credit and must make a payment in order to restore spending power.
Potential credit score damage is the most serious concern resulting from a maxed out credit card, as credit utilization – the ratio of your available credit and your consumed credit – accounts for a significant portion of the Amounts Owed segment of your credit score, which itself amounts to about 15% of your overall score. There are no direct costs associated with maxing out your credit card, but if doing so is a sign of overextending your finances, credit utilization is the least of your worries.
For more information about maxed out credit cards, including tips for dealing with a maxed out credit card and situations when it actually makes sense to take things to the limit, continue reading below.
What Happens When You Max Out a Credit Card?
A few things happen when you max out a credit card. Here’s a quick breakdown:
- Purchase Decline: 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 (e.g. VISA Signature, World MasterCard, Amex charge cards), whose spending limits are determined on a monthly basis and are not communicated to the user.
- Credit Reporting: 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 that remaining at the end of the month. If you don’t, interest will apply to your average daily balance – which can become quite expensive.
- Penalty Rate: 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 27.99%, that could make future transactions potentially costly.
What to Do After Maxing Out a Credit Card:
The measures that one should take in the immediate aftermath of a maxed-out card are fairly commonsensical. Make sure to also check out our tips for avoiding a maxed out credit card for help steering clear of future max-outs and controlling your credit utilization.
Step 1: Pay Your Bill - This will restore your spending power and potentially prevent your utilization ratio from being reported to the credit bureaus as 100%.
Step 2: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.
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.
This is especially true when you do not have any important credit needs, such as 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, after all.
- Very Low Credit Lines: 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.
- 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.
- Debt Consolidation: 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. Considering that the average household could save more than $1,000 on their roughly $7,000 credit card balance by transferring it to one of the best offers on the market, temporarily high credit utilization should be an easy pill to swallow, provided that you use the 0% rate to pay down your debt faster. A credit card calculator will help with that.
- Valuable Rewards: Credit card companies have also been offering extremely lucrative initial rewards bonuses of late. 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.
How to Avoid Maxing Out Your Credit Card
In addition to getting a higher credit limit or new credit line, there are a few things you can do to avoid maxing out your credit card, thus preventing high credit utilization:
- 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, after all, considering the average household spends $549 on gas and groceries alone each month, according to the U.S. Bureau of Labor Statistics.And while things aren't as bad as they once were in this regard – the CARD Act put an end to predatory sub-prime pricing, prohibiting first-year fees in excess of 25% of one’s credit line – planning is still 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.
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?