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What to Expect When You Max Out a Credit Card

Sept. 14, 2018
Credit Card Basics, Credit Cards
What to Expect When You Max Out a Credit Card Story
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Credit limits aren’t meant to be reached. In fact, you should avoid maxing out a credit card at all costs, because doing so can bring serious consequences, from a marred credit score to penalty interest rates.

Your credit scores will probably drop

Maxing out your credit card results in a high credit utilization ratio, which, in turn, can hurt your credit scores. Your credit utilization ratio is the amount of credit you’re using on your cards compared to the amount of credit you have available (both on individual cards and overall). It factors heavily into the “amounts owed” category used to determine 30% of your FICO score.

When you max out a credit card, your credit utilization for that card is 100%. Most financial experts recommend keeping credit utilization below 30% on each card, as well on all your cards combined. Under 10% is even better. Anything above 30% could hurt your scores and make it difficult or impossible to get credit on good terms.

To avoid maxing out a card, set up account alerts. Most major issuers allow users to set alerts to notify them when their balance hits a certain threshold, which can help you rein in your spending.

Your issuer might close your account

Credit card companies can close an account for pretty much any reason, and they sometimes do so when customers regularly max out their cards.

Issuers tend to view a maxed-out card as a sign that you’re in financial trouble, although context does matter. Making a big purchase that pushes your card to its limit might not prompt your issuer to take any action if you systematically pay down your balance. But if your balance is chronically at or near the limit, your issuer will pay close attention to that red flag and might decide to deactivate the account. (You’re still on the hook for the debt, though.)

If that happens to you, the best first step is usually to contact your issuer. A call to your credit card’s customer service line can at least clarify why your card has been canceled. If the agent confirms your card has been shut down due to your maxing out your credit line, you should make a payment as soon as possible. If you can tackle at least a chunk of your amount owed, they may be able to reinstate your card.

» MORE: How to pay off debt

You might get hit with a penalty rate

A maxed-out credit card is often a sign that you’re using more credit than you can afford to pay off, which can lead to late payments. (If you pay less than the minimum amount due, that is considered a late or missed payment.) This can trigger a card’s penalty APR, potentially costing you a big chunk of cash in interest. These interest rates are usually set at the highest amount that a creditor is able to charge, often in the neighborhood of 30%.

Maxing out your card doesn’t necessarily mean a penalty rate will kick in, but it certainly doesn’t help. Issuers typically raise a card’s APR (including for penalty APRs) only after a cardholder is more than 60 days late. Depending on the issuer, you might not have to pay the penalty rate indefinitely, but in most cases, you’ll have to do so for at least six months.

If an issuer activates your penalty APR, and you still have good credit, you might consider transferring all or part of your debt to a balance transfer card with a 0% APR period. Of course, this won’t eliminate the debt; you still have to pay it, but you’ll gain breathing room. Most balance transfers also incur fees of 3% to 5% of the amount transferred.

One way to avoid your penalty APR is to set up automatic payments for at least the minimum amount due. Most minimum payments are relatively low — at least enough to cover accrued interest and fees and a small portion of the principal — but make sure your bank account will have enough to reliably cover the minimum.