We are about to get you in on reasons a maxed-out credit card is bad, but before then, let’s start by saying this; Credit limits for credit cards are the maximum amount you can charge without penalty which depends largely on your credit history. If your credit determined largely by your credit score, is good, you can be sure that credit card issuers will be more willing to extend you a higher credit limit. Income also is another determining factor, as the banks want to know that you earn enough money to pay off your credit card balance.
If you are issued a card with a high limit, it is best not to use it all. This is because doing so can damage your credit score, lead to problems that can push you further into debt, and make it difficult for you to borrow money in the future, etc.
Reasons a Maxed Out Credit Card Is Bad
Risk Of Going Over Your Credit Limit
There’s a likelihood of going over your credit limit even if you keep your balance just below your credit limit once finance charges are applied to your balance. Once your balance goes over your credit limit, it may attract additional penalties, which will put you even further over your limit. Note, 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.
Your Credit Card Loses Relevance
Maxing your credit card eliminates your access to credit when you need it. This means you can’t use your credit for an emergency or to book a rental car or hotel.
The Minimum Payment Is Higher
Since your credit card’s minimum payment is dependent on the size of your credit card balance, it means as your balances increases so does your monthly minimum payments. Maxing out your credit card increases the amount you’re needed to pay each month.
A Penalty Rate Can Be Triggered
A penalty rate is the highest interest your credit card company can charge and could be 30% or more depending on your credit card terms. It means a high-interest rate applied to a high balance can be disastrous because this might mean you are making large monthly payments that are being applied only to interest and not lowering your balance.
It May Not Go Down Well With The Lenders
Maxing out your credit card may lead to your being denied a mortgage or a car loan. When you make an application for a loan, the bank checks to see how much of your available credit you’re using. If your credit balances are too high, banks flags that as a sign you already have more debt than you can handle.
A Maxed Out Credit Card Balance Can Be Harder to Repay
Based on your credit limit, a maxed-out credit card balance could take years to repay, especially if you make only the minimum payment each month.
It is best to keep your credit card balance low enough that you can afford to pay it off each month. Bear in mind that any balance higher than 30% can have an adverse effect on your credit score. Thus to avoid maxing out your credit card by mistake, you are to check your credit limit before you make a purchase with your credit card.