7 Reasons a Maxed-Out Credit Card Is Bad

Why You Shouldn't Max-Out Your Credit Card

Credit cards come with a credit limit — the maximum amount you can charge without penalty. But, credit card issuers don't intend for you to max out your credit card by using your whole credit limit. In fact, bad things can happen when your credit card balance approaches or even exceeds your credit limit.

Your credit score will drop.

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A large part of your credit score — 30 percent to be exact — is based on how much of your available credit you're using. This ratio of credit card balances to credit limits is known as your credit utilization. The higher your credit utilization, or the closer your credit card balances are to your credit limit, the more your credit score is hurt.

Maxing out one credit card is pretty bad for your credit score. Maxing out all your credit cards is much worse. Fortunately, your credit score can recover as you pay down your balances, but first, you have to stop creating more debt.

Lenders won't like it.

Maxed out credit card balances could get your credit card and loan applications denied. When you make an application for a credit card or loan, the bank will check to see how much of your available credit you're using. If your credit card balances are too high, banks take that as you already have more debt than you can handle.

You risk going over your credit limit.

Even if you keep your balance just below your credit limit, you could still end up over your credit limit once finance charges are applied to your balance. Once your balance goes over your credit limit, it can be difficult to get it back down, especially if you're paying only the minimum which covers interest and just a little of your actual credit card balance.

The balance is harder to repay.

Depending on your credit limit, a maxed out credit card balance could take years to repay, particularly if you make only the minimum payment each month. You may plan to pay the balance in full, but parting with that much cash might be too difficult to do as the payment due date approaches.

You could trigger the penalty rate.

Credit card companies have the right to raise your credit card interest rate if you default on your credit card terms by maxing out your credit card. The penalty rate is the highest interest your credit card company can charge and could be 30 percent or more depending on your credit card terms. A high interest rate applied to a high balance is disastrous for your credit card repayment plan.

The minimum payment is higher.

Your credit card's minimum payment is based on the size of your credit card balance. As your balance increases, so does your monthly minimum payment. Maxing out your credit card increases the amount you're required to pay each month, but as mentioned earlier, the minimum only makes a small, barely noticeable impact on your credit card balance.

If you're already having trouble sticking to a budget and making ends meet, a higher minimum payment will put even more strain on your finances.

Your credit card is no longer beneficial.

One of the reasons for getting a credit card was likely so that you could have access to credit when you need it. However, after maxing out your credit card, you're left without any available credit to spend. That's when your credit card truly feels like a burden.

You won't be able to use your credit for an emergency or even to book a rental car or hotel. You may find it more difficult to pay off a maxed out credit card simply because of how much you have to pay to make even the smallest difference.

A Reasonable Credit Card Balance

It's best to keep your credit card balance below 10 percent of your credit limit. That's typically a manageable credit card balance that's good for your credit score and acceptable to lenders. To avoid maxing out your credit card by mistake, check your credit limit before making a credit card purchase.