Paying with plastic can make shopping seem easier — and money seem endless. But credit cards come with a credit limit, or maximum amount that you can charge. Spending up to your limit is often referred to as maxing out your credit card and it’s not necessarily a good idea to spend up to your limit — even if you can afford to pay off your bill in full. Credit card debt can be hard to pay down and the interest can build quickly. Check out the consequences of reaching your credit limit.
Your Credit Utilization Increases
Your debt-to-credit ratio, also known as your balance-to-limit ratio or credit utilization rate, is the percentage of your available credit you are using. You can calculate your utilization ratio on your own. You simply divide your balance by your available credit line. Most credit experts suggest keeping your credit utilization rate below 30%, and less than 10% is even better. For credit-scoring purposes, credit utilization is calculated both by individual card and overall revolving credit. Potential lenders see a higher ratio as a potential red flag and you may have trouble getting approved for a loan or mortgage if yours is high.
To improve your debt-to-credit ratio you can pay down your debt or increase your credit limit. Either option (or both!) will lower your ratio. A third option may be to make multiple payments during the month to keep the balance owed at 30% or less of your limit.
Credit Score Drops
Maxing out your credit cards will lead to your credit scores taking a hit. After all, your credit utilization rate counts for roughly 30% of your credit score. Further, lenders look at how you have handled credit in the past before approving you to borrow for big purchases like mortgages or car loans. Even if you are approved, a lower credit score means you won’t get as good of an interest rate as you could have. Finally, it can take years to repay your credit card, especially if you only pay the minimum each month. (If you’re not sure how your credit utilization is impacting your scores, you can get a free credit report snapshot from Credit.com to see where you stand.)
When you get a credit card, it’s important to commit to use it responsibly. To avoid maxing out your credit card, know your limit and keep track of your spending.
More on Credit Cards:
- Credit.com’s Expert Credit Card Shopping Tips
- How to Get a Credit Card with Good Credit
- How Secured Cards Can Help Build Credit