Everyone knows that credit cards come with a credit limit, the maximum amount of money you can charge on the card. However, what’s not as widely known, is that credit card issuers don’t intend for you to max out your credit card by charging up to the credit limit. As you come closer to your credit limit, it can start to have negative effects on your credit score. Love it or not, much depends on the almighty credit score – from buying a home to getting a good rate on insurance and even employment for some professions.
A credit card is meant to be used as a tool. But when misused, it can cause damage and allow you to sink into debt and hurt your ability to borrow money cheaply in the future. A bad stretch of credit behavior can plague your pocketbook for years.
A credit card is an unsecured loan. If you don’t pay off your card every month, you must pay interest on the amount you owe. Most cards these days charge double-digit interest rates, so carrying a balance from month to month can add up to HUGE interest fees. Remember, your minimum payment will rise as your balance rises. It may start out at $35 a month but quickly rise to several hundred dollars a month.
The rule of thumb is to never spend more than 20% – 30% of your available credit balance. If you go over that 30%, your credit score could take a hit. Maxed out credit card balances could also prevent you from getting additional lines of credits or loans. When you apply for a credit card or loan, the creditor will run your credit report and look at your available credit. If your credit card balances are too high, banks take that as you already have more debt than you can handle.
Many people get a credit card for emergencies, so they have access to credit when they need it. But when you max out a card, you are left with not only no backup emergency plan, but you’ve added extra stress to your finances. Regardless of your credit limit, you should never max out your credit card unless it’s an absolute emergency.
Need help paying down those credit card balances, check out our blog on how to pay down a balance when paying the balance in full isn’t an option: CLICK HERE TO READ.
Assistant Vice President, Lakeville Manager