Why You Should Not Max out your Credit Card

Do you usually max out your credit card?

When you get your credit card, the card issuer may not tell you directly not to max out your credit card. It is your responsibility to learn how to use your credit card responsibly. Unfortunately, some cardholders don’t even know what it means to max out credit card. At what point will you be considered to have maxed out your credit card? Well, before you can determine whether you are maxing out your credit card, you need to know your credit limit.

When you are issued a credit card, your card issuer will place a limit to the maximum amount you can spend with the card before you make payment back to the credit card company. The level of the credit limit that you can enjoy is hung on many factors such as the level of your income, other credits that you have and your creditworthiness among others. In order for you to really understand what it means to max out credit card, I will need to make this illustration. If the credit limit on your card is $3,000, you may not be able to spend more than that amount with the card except you make repayment to your card issuer. So, if you have already purchased goods worth $3,000 in a month, you have already maxed out your card. Your credit limit may not be $3,000. Whatever your credit limit is, any time you use up all your available credit to the point that you can’t make further purchases, this situation can be described as having your credit card maxed out. You may think there is nothing wrong with that as long as you pay off the balance at the end of the month. It is more than that. Maxing out of your credit card is not good for these following reasons:

Read Also: Advantages and disadvantages of Credit Cards

It lowers your credit score: Experts advise that one should keep his credit utilization ratio below 30%. Credit utilization ratio is the expression of your card balance as a percentage of your card credit limit. For example, if your card balance is $2,100 while your credit limit is $3,000, your credit utilization ratio is 70%. This is arrived at by dividing your card balance by your credit limit. This is quite high compared to 30% benchmark. When your credit utilization is high, your credit score will drop. This is because it will be assumed that you don’t have much credit available for use any longer. Credit utilization is one of the main parameters that credit bureaus used in calculating your credit score. In fact, this takes 30% of the criteria used for the calculation of your credit score. However, the adverse effect of high credit utilization can be easily corrected. You can achieve this by bringing your credit utilization below 30%. By the time you do this consecutively for about three months, you will start seeing the positive effects on your credit score. Two ways of lowering your credit utilization ratio are by reducing your credit card balance/spending and increasing your credit limit. You may have problem with the option of increasing your credit limit when your credit card is already maxed out. But if you can prove that your income have improved significantly which will make it possible for you to pay off your card balance, your request to increase your credit limit may be granted.

Read Also: Credit Score: How to improve credit score

You may be risking the closure of your account: The agreement you signed with your credit card company is that you will use your card responsibly. But how many people actually read and understand the fine prints before they accept their card offer? Your card can be closed any time if your risk profile changes significantly. When you max out your credit card on a continuous basis, it can be an indication that you are having difficulty in managing your finance. In reality the assumption may not be correct but that is how credit companies and other creditors view or interpret the situation.

Higher APR: When you first applied for your credit card, your credit will be assessed based on your situation at that time. This determines the apr that will apply to you. But if you continually max out your credit card, your credit score will drop and your risk profile may need to be reviewed. This may disqualify you from the existing apr you pay on your card balance. You need to understand that credit card companies don’t usually have a flat rate on their cards. They may advertise apr ranging from 15% to 21%. This means that customers with best credit score may enjoy the lowest apr while other people may fall into the highest apr of 21%.

Inability to get new credit: You may find it difficult to get new credit or loans. Creditors or credit card companies will always make inquiries on your credit before they grant you fresh credit or loan. With your credit card already maxed out, they will come into conclusion that you will not be able to pay back the loan. At best, they may assume that you will likely be making late payments. No creditors like this.

Inability to repay: You may not have intention of carrying balance on your card. But what happens when you have emergency that requires that you make instant payment? If you have already maxed out your credit card, the option that you may be left with is to use the money you would have used to repay your card balance to meet the urgent need. Before you know what is happening, that is how debt will creep in. If care is not taken or you don’t make deliberate effort to pay off the card balance immediately, the balance may linger for a long time. Remember you are not only paying back the card balance. You need to pay interest on the balance. If the apr on the card is high, you will realise that you will be servicing the interest while the principal remain. This happens especially if you are only making minimum payment.

Read Also: Effects of Late Payment on Credit Score

Higher minimum payment: Credit card companies may not compel you to pay off your card balance at the end of the month but they will require that you make a minimum payment. Minimum payment may be a certain amount or a percentage of your card balance that you need to pay at the end of the month. When your card balance is high, this will reflect in the minimum amount you will need to pay.

Leave a Reply

Your email address will not be published. Required fields are marked *