If you max-out on your credit card, it means that you have reached the maximum amount of credit that you can avail on the card without penalty.
What is a maxed out credit card?
It means that you have reached or crossed your credit limit. When a financial institution issues a credit card on your account, you get a credit limit. For instance, if your credit limit is $2000 and if your credit balance is $2000 or more, than it means you are maxed out.
So what happens when you max-out on your credit card? That’s what we are here to find out! Read on!
What Happens if You Maxed Out Credit Card
Credit Card limits
What is a maxed out credit card? Maxing out on your credit card means that you keep on charging purchases on your card till the balance reaches the limit on your card.
Credit card limits are determined based on the individual’s credit history or credit score. So maxing out on a credit card will impact your credit card limits in the future.
- Your credit card limit will be impacted. Creditors and banks issue cards with higher limits for those who have a good credit score.
- This will make it harder for you to borrow money, as the limit will be lower.
Higher Interest Rate
This is one of the most obvious impacts of maxing out on your credit card.
- For instance, consider that you have a balance of $5000 in your credit card and the interest rate is 18%. This will cost you $900 a year for interest charges. If the balance is higher, the interest rate will also increase along with it.
- When the loan balance increases, your monthly payments will also increase along with it, due to the maxed out credit card.
What could happen is that you might start borrowing on credit lines in order to make the monthly payments, as you are not able to pay up using your income, and this could make the problem worse.
Drop in Credit Score
You are not supposed to reach your credit limits, as it can impact your credit scores.
- In case of a maxed out credit card, the credit utilization ratio becomes higher and this affects your credit score. The ratio between the credit amount used to the credit amount available becomes higher, when you max out your credit card.
- This ratio is used for calculating 30% of the FICO score.
- The ratio becomes 100% when you max out your credit card. It is advisable to keep the ratio below 30%, so anything above this percentage could affect your credit scores, so it will become difficult for you to get a good credit with low interest rates.
Penalty Interest Rates
Penalty rates or over limit fees are the highest possible rates of interest that can be imposed on your credit cards.
- When you have a maxed out credit card, lenders feel that you might be in financial trouble and the probability of default is higher in your case, so they impose higher rates of interest or penalty rates.
- A high interest rate on a maxed out credit card will rack up the balance and increase it further.
With a maxed out credit card, you also stand the risk of getting your account closed.
- If you regularly have a maxed out credit card, your credit card issuer could close your account, especially if you chronically reach the limit.
- It sends out a kind of red alert to the card issuer and they can deactivate the account.
A maxed out credit card is a kind of signal to lenders that you might be in financial trouble.
- Lenders might consider that you are more likely to default on loans, so they deny you loans or impose.
- When you max out on your credit card, credit providers get alarmed and lenders reject loan applications.
- Lenders check your FICO scores to find out whether you can pay up the mortgage dues in time. If your scores are low, then they realise that the risks of lending are greater, so they might deny mortgage applications.
- Maxing out on your credit card could cost you your home loan.
- If you max out, it presents a red flag to underwriters, as it shows them that you have poor skills in debt management so it is difficult for you to qualify for a new loan.
Even if you qualify for the mortgage, you will have to pay higher rates that could cost thousands of more dollars.
Loss of Emergency Funds
- If you do not have an alternative dedicated emergency fund, you might have to depend on your credit card line for emergency funds.
- When you have a maxed out credit card, you are denying yourself of access to such emergency funds in case of a serious financial crisis.
Credit lines are a reliable way of cashing in during an emergency. You could lose out on this income avenue by maxing out on your credit card.
Wrap Up – Maxed Out Credit Card
A credit card can be very comforting as it allows you the luxury of spending money that you don’t own at the time, but the facility comes with certain ramifications that might come into effect if you max out on your credit card.
While determining a person’s FICO score, the formula calculates the spending limit for your card and the available balance and if you max out and exceed the spending limit, it damages your credit score causing other issues as well.
Tip: Do your best to see that you don’t max out credit card.
Set up your own credit limits and make sure to keep it well below what is allowed by your card issuer. This way, you can keep your finances in a good shape and make sure that you will always have access to credit when you need it.
It is advisable to keep your balance below 30% of the credit limit, so that it prevents damage to your credit score and shows that you are a person who is financially reliable and has good debt management skills.