Most experts say that you should never max out credit cards. All issued credit cards have a limit. You cannot spend beyond this limit. For instance, let us assume that you have a credit limit of $10,000. If your current balance is $8,000, you can only use your credit card for purchases that are $2,000 or less. In case your balance reaches $10,000, you can no longer use your card. If you try, your card will be declined. The only time when you are allowed to use it is when you pay off your balance. But as long as it stays near the limit, you will be prohibited from using it to make purchases.
While there are many credit card benefits to maximize, that does not include the credit limit. You should never max out credit cards because you will be putting your financial position in a very compromising position. One unexpected event and you might find yourself with too much debt to pay off.
According to the latest statistics, the average household has $16,048 worth of credit card debts. With the current interest rates, you should expect to pay almost $2,600 worth of interest. If your interest is higher than the average, you will end up paying more. That money is something that you can use on another expense. But because of your debt, that amount will just be sent to your creditor – making them a couple of thousand dollars richer.
Reasons to avoid reaching your credit limit
There are credit card habits that can lead to financial problems. One of them is maxing out your credit card limit. If you want some motivation to never max out credit cards, you need to remember the following.
You cannot use your credit card anymore
Once you reach your credit limit, your card will no longer be of any use to you. At least, if you continue to stay in that limit. And if you think that your balance will stick to the limit, you are mistaken. If you do not pay any of the balance, the interest rate will continue to accumulate. You will end up with a growing balance even if you are no longer using the card. And if you pay only the minimum payment requirement, you will find it hard to lower your balance. You need to strive to pay more than the minimum if you want to go much lower than your credit limit.
Your credit score will go down
In a FICO score formula, 30% is influenced by the credit utilization. This is the ratio between the credit limit and balance of all your debt accounts. The higher the ratio, the lower the credit score. If you max out your card, that will increase your credit utilization ratio. It shows how you are unable to keep up with your payments – resulting in your debts continuing to pile up. That irresponsible behavior is never good for your credit score.
You become a high-risk borrower
This is bad news for creditors and lenders. It means there is a higher chance that you will not be able to pay back what you will borrow them. That will make it harder for you to get a loan approval. A 580 FICO score is needed if you want the best terms for an FHA loan. If you want to enjoy the best credit card accounts with the most rewards and lowest interest rates, you need to show at least a 700 credit score. But if you have a maxed out card, this might be hard to meet. In case you do get a loan approval, this will be given with higher interest rates.
Your finance charges will skyrocket
The finance charge is the amount that is added to your credit card balance if you carry it over to the next month. This is calculated using your balance and interest rate. If you have a high balance you can expect that you will have a high finance charge. This means your debt will grow at a faster rate. You need to start giving a higher monthly payment so you can pay this finance charge and a portion of the principal balance.
You are closer to paying a penalty rate
With such a high monthly payment, you are more likely to incur penalty charges. It is either you cannot afford to pay the high minimum payment requirement or you cannot pay any amount at all. When this happens, you will incur late penalty charges. That will only make your balance increase and will also pull your credit score down.
You will feel stressed
If there is one reason that you need to remember to never max out credit cards, it is this one. It is probably one of the most influential and destructive of all the reasons. This unpaid debt will always be over your head. It will occupy your every thought and you will find it hard to concentrate on other things. Instead of focusing on increasing your monthly income so you can pay off your debt, you will find yourself distracted. Soon, you will feel anxious and panicked because of the huge debt that you need to pay off.
What is the right credit balance to keep?
The truth is, this article is not telling you to stop using your credit card. This is still the easiest way to maintain a good credit score. The problem is not the choice to use it but how you use it. As long as you never max out credit cards, you can use it with any purchase that you have.
But what is the best credit balance to keep?
10% of the credit limit
Ideally, you need to keep your balance below 10% of the credit limit. If your credit limit is $10,000, your balance should be $1,000. If you have $1,500 worth of credit card purchases, you need to make sure that you can pay at least the $500 within the billing cycle. That way, when the next billing cycle comes, your balance is still within the 10%. This is the best percentage because it keeps your debt within manageable amounts. It will also keep it from affecting your credit score. According to experts, if your debt reaches more than $7,500, it will be harder to pay it off. So keep your debt within an amount that you know will not compromise your ability to pay it off.
Or none at all
If you never max out credit cards, that is good news. But a better scenario is not having a balance at all. You can still use your card, but make sure that you pay the amount in full when the billing statement comes. It helps to have a credit card budget. For instance, each month, you will allow yourself to use your credit card for $500 worth of purchases. When you get your income, put aside this cash amount. When your billing statement comes, you should get that $500 cash and use it to pay your balance in full. This is the best way for you to maximize the use of your card without ending in debt.