Having to max out credit cards is one of the scariest financial situations to be in. This is not a situation you want to be in at any point in your life. You have been taught from the very beginning to avoid maxing out your cards. One reason for this is that you are exposing yourself to the possibility of paying huge penalties and interest if you miss that payment.
That being said, there is always an exception to the rule even when it comes to your credit cards. There are a few specific situations where it might be acceptable to max out credit cards. Here are some of them worth knowing.
You are facing some serious emergency
When you have to choose between swiping your card and a life-saving medical procedure, that should not be a hard decision. You need to do anything to help keep you alive. You can earn and get back money but it will be hard to add years to your life. This is one of the situations where it is acceptable to use and even max out your credit cards.
You will use the rewards and you have money to pay the bill
There are times where you have a credit card because of the rewards it gives you. This is a delicate balance between using the card correctly as against charging unnecessary expenses just to get the points. However, if you diligently pay your card every month in full, you might be able to max out your cards for the rewards.
When you do this, you have to make sure that you pay your bill in full at the end of the month. If you choose to pay only the minimum amount, you could be paying a lot more in the succeeding months. Max out credit cards for the rewards only if you are sure that you will be able to pay back the whole amount in full.
Unemployment and cash is running low
This is a tricky spot because when you are unemployed, you need all the funds you can get your hands on. Trading Economics shared that unemployment is at an average of 5.76%. This will ensure that you are able to meet all your payment obligations as well as basic necessities. When you are unemployed for a longer time and cash is running low, it might be a good idea to start using your credit card.
Max out credit cards when consolidating debt with 0% rate on the card
Another reason why you might want to max out your cards is when you are consolidating on a 0% card. This is one of the debt repayment strategies that a lot of people are using to get out of debt. The idea is simple enough to understand. You put most, if not all of your debt obligations under one account. It makes repayment a lot easier to manage.
The reason why this is a preferred method is that it gives consumers the chance to focus on that one payment every month. Debt consolidation can also lower the monthly payment, especially with a 0% rate. This is why it is acceptable to max out a 0% credit card when you are using it to consolidate your debts.
What to expect when you max out
There are instances where you can max out credit cards which are acceptable but you also need to understand what it can do to your finances. Take a look below to understand some of them.
Your credit scores will probably drop
The reason why you might see a dip in your score is because of your credit utilization ratio. If you max out your credit card, your ratio will go up and affect your score negatively. Remember that your credit utilization ratio represents about 30% of your score computation. That is a big percentage of your score that is why maxing out your cards can negatively affect your credit score.
However, one thing you need to do is consistently pay down the amount. If you maxed out because you consolidated your debt, make sure that you pay down your debt every month. What happens is that as you pay it down, your credit utilization ratio goes down. On top of that, your on-time payment will also be a positive factor in your score. These two will help you bring your score back up in no time.
Your budget might tighten up
If you max out credit cards, there is a good chance that your budget will be a little tight. The reason for this is that you will suddenly have a big amount to pay every month. This is why it is a good idea to prepare your budget before you max out your cards if possible. Until you pay off your cards, you might need to look for ways to save money.
One idea is to take on a frugal lifestyle to help you manage a tight budget. Being frugal means you are trying to live below budget to save money. This can actually be a great way to exercise your creativity. Rather than ordering take out food on most nights, try learning how to cook and prepare them one weekend. This way, you do not have to cook every night and save time as well.
How to prevent it from happening
If at all possible, do not max out credit cards. There are things you can do to help you lower the chances of this happening. Here are some of them you might want to start including in your financial plans.
Create an emergency fund
Having an emergency fund helps you address any sudden financial need. If you save money, you would have funds to help you through unemployment. It can even shoulder some medical expenses if need be. It all depends on the amount you have saved. This is why you need to have a strong reserve fund to get you through even the toughest emergencies.
The challenge is that not a lot of people (57%) can manage even a $500 emergency according to CBS News. This is why you need to make sure that you get to save money for emergencies. There are a lot of theories about how much exactly you need. Some say $1000 while others say more. One thing you have to keep in mind is to get started. And continue saving until you are confident about the fund.
Staying healthy will do a lot of wonders in helping you manage your finances. For one, you get to lower your medical expenses. You also decrease the chances of getting sick and being productive for a longer time. The healthier you are, the better you can manage your money and even find other sources of income to add to your budget.
Create multiple sources of income
As mentioned earlier, looking for other sources of income will help you with your finances. It can even take away the need to max out your credit cards because you get to save for the future. Creating multiple income streams will increase your ability to save for the future. It can also lower your stress level as you have fewer things to worry about.
There are instances where you can max out credit cards but you need to be able to pay them off in full the first chance you get. The longer they are unpaid, the bigger they get and the heavier financial burden they become.