7 Reasons a Maxed-Out Credit Card Is Bad

Credit limits for credit cards—the maximum amount you can charge without penalty—are determined mostly by your credit history. If your credit, determined mostly by your credit score, is good, credit card issuers will be more willing to extend you a higher credit limit. Income is another determining factor. Even if your credit history is perfect, it's unlikely a bank would issue you a card with a high limit if you are making minimum wage. They want to know that you earn enough money to pay off your credit card balance.

Even with a high limit, though, it's a bad idea to use it all because doing so can damage your credit score, lead to problems that can push you further into debt, making it harder to borrow money in the future, and more. Credit cards are convenient and often offer perks and discounts that aren't available when paying by cash, but be sure to avoid certain pitfalls when using a credit card.

 

01
Your Credit Score Can Drop

person checking credit score after maxing-out their credit card
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A large part of your credit score—30 percent—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.

02
Lenders Won't Like It

Maxed out credit card balances could lead to you being denied a mortgage or a car loan. When you make an application for a 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 a sign you already have more debt than you can handle.

03
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, additional penalties can be applied, which will put you even further over your limit. It can be difficult to get it back down, especially if you're making only the minimum payment each month, which usually covers only the interest and rarely much more.

04
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 other unexpected expenses might make that too difficult to do as the payment due date approaches.

05
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 exceeding your credit limit. 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 can be disastrous because it might mean you are making large monthly payments that are being applied only to interest and not lowering your balance.

06
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 do your monthly minimum payments. Maxing out your credit card increases the amount you're required to pay each month.

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.

07
Your Credit Card Is No Longer Beneficial

One of the reasons for getting a credit card is to have access to credit when you need it. However, maxing out your credit card eliminates that benefit. 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.

A Reasonable Credit Card Balance

It's best to keep your credit card balance low enough that you can afford to pay it off each month, keeping in mind that any balance higher than 30 percent can have a negative impact on your credit score. To avoid maxing out your credit card by mistake, check your credit limit before making a credit card purchase.