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What to Expect When You Max Out a Credit Card

May 29, 2015
Credit Card Basics, Credit Cards, Credit Score
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 your card at all costs, because doing so can bring serious consequences, from a marred credit score to penalty interest rates.

Your credit score will drop

Maxing out your credit card results in a high credit utilization ratio, which, in turn, can hurt your credit score. 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%; anything above that may negatively impact your credit score and make it hard or impossible to get credit on good terms.

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

Your issuer might close your account

Credit card companies can close an account for pretty much any reason, and sometimes do so when customers max out their cards. Many issuers view maxing out your credit card as a sign that you’re in financial trouble and close an account to limit their risk.

If this 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 APR

Often, a maxed out credit card means that you’re using more credit than you can pay off, which can lead to late payments. These two factors combined 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, reaching up to 29.99%.

Maxing out your card doesn’t necessarily guarantee that the penalty rate will kick in, but it certainly doesn’t help your chances. Issuers typically raise a card’s APR (penalty APR included) only after a cardholder has defaulted for more than 60 days. And you’re not necessarily stuck with the penalty APR forever, but in most cases, you’ll have to pay the higher rate 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 the balance to a balance transfer card with a 0% APR period. Of course, this won’t eliminate the debt; you’ll still have to pay your balance as soon as you’re able.

One way to avoid your penalty APR is to set up automatic payments with your bank for at least the minimum payment. Most minimum payments are relatively low, but it’s still wise to draw from an account that you know can reliably cover the minimum.

Maxing out your credit card can be a setback, but it doesn’t have to be the end of the world. If you respond to the ramifications wisely, you can limit any damage to your credit and get back on track.

Kevin Cash is a staff writer covering credit cards and consumer credit for NerdWallet. Follow him on Google+.

Image via iStock.