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Do you ever hit the limit your credit card allows you to borrow against?
Are you curious what the consequences are of a maxed-out credit card?
In many cases, you cannot spend more than your credit card limit, but you can hit the limit and will pay the price for doing so.
In this post, I discuss what happens to your credit when you max out your credit card, how bad it is to do this, and solution to help you from reaching you limit in the first place.
Table of Contents
What Happens When You Max Out Your Credit Card
What Does It Mean To Max Out Your Credit Card?
Maxing out your credit card account occurs when you use the maximum credit limit available on your credit card.
For example, if you have a $10,000 credit limit, spending all $10,000 of your available credit in a month would be maxing out your card.
In other words, any time you reach your credit limit on your credit card, you are maxing it out.
But what happens when you max out your credit card?
Unfortunately, doing so can incur numerous charges and cause issues with your credit standing.
Here are some of the most notable things to know when you max out your card.
A Change In Your Credit Score
In order to maintain a good credit score, you need to keep your credit utilization rate below 30%.
Continuing with the above example, maintaining good credit would mean only using $3,000 of the available $10,000 credit line.
Having a maxed-out card will be reported to credit bureaus and may have a negative impact your credit, lowering your score.
In the short term, this isn’t a huge deal, especially if you are not planning on taking out a loan in the near term.
As long as you pay down your high balance and make payments on time, your credit score will recover in the coming months.
However, a drop in your credit score is an issue if you are planning on taking out a loan soon.
The lower score will raise the interest rate you qualify for, costing you more money over the life of the loan.
And if your score drops enough, you might even be denied the loan.
Failure To Close On Your Mortgage
This is an issue a lot of people don’t think about and as a result, get burned in the process.
Many times you will qualify for a home loan and wait a couple of months until closing.
A few days before you sit down to sign the paperwork and close on the loan, the mortgage company will run your credit report again.
If they see a large decrease in the total available credit you have or new credit accounts, this could be a red flag and they might decide to not close on the loan.
I’ve seen people qualify for a mortgage and then before they close on the loan, go out and buy thousands of dollars of furniture.
To save some money, they open up the store credit card to get 15% off their purchase.
But this new account will be seen by the bank right before closing and could cost them the loan.
Smart realtors and mortgage brokers will specifically tell you to not make any large purchases on your credit cards or open new credit accounts until after you close on the loan.
You May Not Be Able To Go Over Your Limit
In some cases, you may be able to get a higher credit limit so that you can afford additional spending past the amount that you’ve already maxed out.
Just make sure you then don’t hit this new higher limit as well.
That being said, this is not true for everyone.
You may find yourself unable to go over the full limit, which will result in your purchase being denied and you need to use another credit card, a debit card, or cash to make the purchase.
- Read now: Learn the pros and cons of debit cards
Just make sure that if you can go over your limit, you will be able to take on that extra debt and pay it off as soon as possible.
Your Minimum Payment Will Increase
Your credit card provider has likely established a minimum payment amount that they will accept for your credit card balance each month.
This is usually 2% of the statement balance or a flat dollar amount.
Although you should pay your credit card bill in full if possible, this lower minimum payment can be helpful for those going through financial hardship.
When you max out your credit card, however, your credit card issuer may increase your minimum payment, which can only exacerbate your financial issues in the long term.
You Will Pay Fees And Higher Interest Rates
Most credit card companies will charge you an over the limit fee if you spend more than your credit limit.
This fee is typically around $50.
But it gets worse.
They will also increase your interest rate as well.
You will go from the standard APR to a penalty APR which tends to be 20% or higher.
And if you are on a promotional rate from a balance transfer, the promotional rate goes away and the penalty APR kicks in.
Make sure you understand the fees and interest charges as a result of maxing out your credit card.
You Will See A Rapid Change To Your Balance
The more credit card debt you have, the more your interest rate is going to impact you.
If you have a high credit limit and you max out your card, you’re going to notice that your debt will start to skyrocket over time.
The longer it takes you to pay this, the more your interest rate will impact you as you gradually accumulate more debt on a monthly basis.
Of course, it’s also important to ask not only what happens when you max out your credit card, but what may happen when you find yourself unable to pay.
Missing monthly payments or being unable to chip away at your debt can put you further in debt by incurring late fees and increasing your interest rates, which only build upon your existing debt.
If you’ve maxed out your credit card, it’s important to sit down and come up with a debt repayment plan as soon as possible to avoid causing further harm to your credit score and financial health.
What Can I Do To Remedy The Situation?
Sometimes, it’s not a matter of asking what happens when you max out your credit card, but what you can do to fix it if you already have.
The good news is there are always solutions to begin turning your debt around and repairing damage to your credit score and credit history.
Let’s dive into a few remedies that you should know about.
Try To Pay Your Balance When Your Payment Is Due
In some instances, you may have had to max out your credit card to pay for something that you could normally afford but maybe didn’t have access to the funds at the time.
In this scenario, it’s important to pay off your full balance when the statement arrives.
This may prevent your credit utilization from being reported and affecting your credit score.
Then, make sure that you have the funds necessary before you pay off another major expense with your credit card.
Consider A Balance Transfer Credit Card
If you have a great FICO score above 690, and a generally low credit utilization ratio with the exception of the most recent spending, you may be able to find a balance transfer credit card that offers a lower annual percentage to make it easier for you to repay your debt.
Just keep in mind the potential balance transfer fees that some providers may charge you in the process.
Take Out A Personal Loan
Although a debt consolidation loan is generally a last resort, if you have too much debt, it can help you consolidate your debt into one tool.
This will help you pay off one or multiple credit cards that you may be behind on.
Then, all you have to worry about is paying your loan back on time, including interest.
However, if you’re in debt and you can’t afford to take on more debt, this option may not be the best fit for you.
The last thing that you want to do is take on more debt.
In some cases, you may not be able to get a personal loan because of the damage to your credit score as well.
Look For Debt Repayment Support
Options like debt repayment support offered by credit counseling agencies or credit hardship programs can help those with serious debt who have difficulty paying it back experience some relief.
When in doubt, it can always be helpful to reach out directly to your credit provider as they may work with you to come to a solution that you’re both satisfied with.
A good starting place if you need help after reaching out to your credit card company is NFCC.
This is a non-profit that helps people get out of debt that finds solutions for you and limits the risk to your credit score.
As with any other solution on this list, do your due diligence to understand the advantages and disadvantages of your choice before you commit fully to it.
At the end of the day, maxing out your credit card is not something you should try to do.
While it is OK to do in for a large expense you have the cash for, it is not OK if you don’t have the money.
You are going to end up paying a lot of fees, a higher interest rate, and put yourself into a financial situation you are going to have a difficult time getting out of.
Learn to use your credit cards wisely, and you can limit or eliminate the risk of hitting your credit limit.
- Read now: Click here to learn how to use credit cards wisely
- Read now: Learn the pros and cons of credit cards
- Read now: Find out the tricks to stop using credit cards
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.