When people have a high limit on their credit cards, they often feel powerful and take advantage of it. After all, what’s the harm in maxing out a credit card, when you can just repay it? There are plenty of reasons why! Read on to find out what happened when you max out a credit card…
Credit Score Gets Ruined
The most immediate effect you’ll see when you max out a card is a hit to your credit score. A large portion, about thirty percent, of your credit score comes from how you utilize your available credit. In other words, the more of it you spend, the worse you’ll do. When credit utilization is at its highest, the credit score is at its lowest. So, maxing out a credit card, or, even worse, multiple, can devastate your credit score. Sure, it’s possible to raise it again. But who wants to go through all that avoidable pain?
Most Benefits Disappear
When you only use a bit of available credit, there’s plenty of benefits to having a credit card. However, when the balance gets too high, most of those benefits fly straight to the window. Travel points? Gone when maxed out. Cashback? See ya. Moreover, banks check credit cards when their clients apply for loans. No one gets a loan with a maxed-out card because it means that the person is likely already in debt!
Facing Penalties
There are also a lot of risks and penalties you will have to face with a maxed-out credit card, or, worse, several cards. First of all, a penalty can be applied to the card when you cross the limit. Even being merely close can cause charges to hit. Also, these likely won’t be small fees, either. In fact, some card companies charge 30% or more of the balance in interest when you max out a credit card!
Also, do not forget, it’s much harder to repay the full sum when a card is maxed out. Meanwhile, as stated, with maxed out balances, the interest increases. So, as you can see, it becomes something of a sinking trap. Unless one can pay off a massive portion at once, which is rarely the case, the interest continues to max out the account and accrue penalties, even after payments.
High Minimum Payment
With a higher balance, the monthly minimum payment also grows a lot. So, when you max out a credit card, the monthly payment jumps up to its maximum as well, making it harder to repay it each month. Find it hard to pay the minimum payment back every time? Then, maxing out the credit card is not an option. If the minimum fee is challenging, then the maximum will be flat out impossible.
So, is it worth it maxing out your credit card balance? Absolutely not. So, after grabbing a credit card, be mindful of using it. Accept a balance that can be paid off each month and don’t make it higher than 30% to keep a good credit score.
Sources: The Balance, Mortgage Afterlife