Why You Should Avoid Maxing Out Your Credit Card

Reasons to Avoid Maxing Out Your Credit Card - Credit cards are so useful. However, like many useful things, it has dangers. Therefore, there is a need to recognize the dangers. One of the dangers is maxing out a credit card.

In this article, we are going to explain what maxing out your credit card means. Then we will move on to talk about the reasons why you should avoid maxing out your credit card.

Maxing out your Credit Card

Credit cards come with credit limits.

A credit limit is the maximum amount of money that you can spend on a particular credit card without facing any penalty from the credit card company. Your spending should be below the credit limit.

A credit card is maxed out when you have spent close to the credit limit. For example, if you have a $5,000 credit balance on a card with $5,000 credit limit, then you have maxed out your card.

With a maxed out credit card, you will be unable to make payments without incurring extra costs. You also incur a higher interest rate.

Dangers of maxing out your credit card

1. It affects your credit score

Your credit score is important, and you would definitely not want anything to make it drop. Maxing out your card can make your credit score drop. How? Your credit score consists of different factors. The credit that you have available for use is a major factor. In fact, 30 percent of the entire credit score is based on this factor.

Credit companies usually look at the ratio of your credit balance to credit limits. This ratio is credit utilization. A low credit utilization value is better than a high credit utilization value.

Stop maxing out your credit card! Or else, prepare to have your credit score take a hit.

2. You incur more debt

Using a credit card means that you already owe a debt. You will incur more debt if you max out your credit card. Higher interest rates mean that you also have to pay more money back to the credit company.

It might take you a while to repay your credit card debt depending on your credit limit. It would even take longer if you are making just the minimum payment. Unexpected expenses might come up that disrupt your plans for payment. There is a chance that you go over your credit limit

Having a credit balance that is just below your credit limit might not be the best for you. This is because when other charges are considered – like the finance charge – it is possible that your balance tips over the credit limit.

When this happens, you will incur even more charges or fees that would now take your credit balance even farther away from your credit limit.

Getting back on track would be hard especially if you earn minimum wage or if you make only the minimum payment each month.

3. Creditors do not like debtors

Although you might not necessarily be termed as a debtor if you exceed your credit limit, creditors might treat you like one. When you make it a continuous practice to max out your credit card, these lenders would consider you as a person with poor spending habits that don't know how to manage money. This would make them less likely to provide you with certain privileges.

Say for example you want to take a car loan. After filling out the application and all the necessary paperwork, the bank where you are applying for a loan usually checks to see how good your credit score is or credit utilization value.

Depending on what the bank finds, they'll decide whether to accept your application for the loan. If your credit card balances are low, good for you. On the other hand, if your credit card balances are high, then the bank might be more reluctant to provide you with a loan.

4. Your credit card becomes useless

The main reason why anybody gets a credit card in the first place is to be able to pay for products or services even without having the money. When you max out your credit card, you lose this benefit.

Since you have exceeded your credit limit, you would no longer be able to use the credit card for the reason you got it in the first place. You would have to clear the balance on the card before you get to use it again.

5. Increase in your interest rate

Sometimes paying the normal interest rate that is associated with your credit balance can be difficult. The debt is even harder to pay on a maxed out credit card. Maxed out credit cards have increased interest rates of up to 30 percent.

The 30 percent interest rate is the highest that the credit card company can charge and it is referred to as the penalty rate.

With an interest rate as high as 30 percent, you would find it even more difficult to pay back the credit balance. A bulk of your monthly payment would go into paying that interest instead of paying off your actual credit balance.

6. The required minimum payment is higher

If you have a large credit balance, you get to pay more in minimum payment than when you have a smaller credit balance. For example, if you have a credit balance of $3,000, you'll be required to pay a higher minimum payment than when you have a credit balance of $1,000.

Having a maxed out credit card means that you'll have to pay the maximum, minimum monthly payment for that credit card account. Having a higher minimum payment will cause you many worries if you have a low income or if you have problems with spending within a budget.

Tips on how to avoid maxing out your credit card

We have considered why it would not be wise for you to max out your credit card. You are probably already thinking of what you can do to make sure it does not happen. Here are some tips that can assist you as you try to keep your credit balance from exceeding the credit limit:

1. Transfer balances between cards

This is applicable if you have more than one credit card with different interest rates and credit limits.

How it works: Transfer the balance from a credit card with a small credit limit or high-interest rate to a card that has a larger limit or lower interest rate.

This way, you are not going to be too concerned about maxing out your card. Transferring balances between cards often come with some charges so it would be wise to check whether you would incur charges or not.

Take your time to consider the pros and cons before making your final decision so that you do not make a poor financial choice.

2. Make financial budgets and keep to them

Understandably, making and living by a budget can be difficult, and it is sometimes easier said than done. The truth though is that you need a budget if you want to stop maxing out your credit card. Super successful people use budgets, so there is no reason why you should not too.

Making a budget would involve taking into account all that you spend your money on from food to transportation and even your online subscriptions. You’ll also need to take into account how much money you make and how you intend to pay the minimum monthly payment on your card.

Aside from making a budget, you’d also need to stick and live by it. This means that you would have to change some bits of your lifestyle, especially your spending habits. It would be important that you use your credit card only when there are emergencies so that you do not max it out.

Try as much as possible to buy things with your real money and not with your credit card. When you save to actually buy stuff or pay for a service, you are learning how to manage money and how to spend on things that have better value and not buying based on impulse.

If at all you use your credit card, make sure to pay off the credit balance as soon as possible to be on the good side of the credit card company.

3. Make payments across different cards

When faced with making a payment, especially a big one it would be better to split the cost across your different credit cards.

Say, for example, you want to make payment for a car using your credit card. If you decide to use just one card to make a payment, it is likely that you would exceed the credit limit. On the other hand, if you split it across different credit cards, then there is a lower chance of exceeding your credit limit as different cards would now bear the cost.

Usually, it is better to make big payments, such as buying a car or property with the cash you have in hand or with the balance in your bank account. This is because you’ll still have to pay the money back if you use a credit card and this can cause some problems since you made a big purchase.

4. Pay your balance on time

As mentioned before, your credit card is maxed out when the credit balance exceeds the credit limit. In other for that not to happen, you would need to be consistent in paying your balance on time.

If you notice that your credit balance is slowly reaching the credit limit and you know you still have some spending to do, it would be wise to make a payment on the account to free some of your money.

Sometimes paying the minimum monthly payment might not cut it. You’ll need to pay more than the minimum because most times, the minimum payment barely covers the interest on the account. When you pay more than the minimum monthly payment, you are making sure that you free up some of your balance in the account.

5. Increase your credit limit

You can increase your credit limit depending on how well you have been making payments in the past. If you are a customer that makes consistent payments then the credit company would not be too bothered with increasing your credit limit. The opposite is the case if you have been inconsistent with your payments.

A larger credit limit would mean that you'll have to spend more before you can max out your credit card. This does not mean that you have to spend the money, but it does give you a little more freedom just in case.

6. Take out other loans

You could take out loans from banks that offer terms that are more flexible and conditions and lower interest rate from your credit card company.

You could also take loans from your friends and family members instead of using your credit cards. You can pay back the loan from your friends and family at the time you both agreed and sometimes with no interest at all.

This way, you can keep your credit card for only when there are emergencies.

Conclusion

Keeping your credit card balance low is the best option for you. When the balance is low, it would be easier for you to pay it off at the end of the month without any hassles.

Also, remember always to check the credit limit of every credit card that you own so that you do not make the mistake of maxing out the card.