Maxed-Out Credit Cards: Why It's Bad and What to Do About It

Is it wrong to max out your credit card? That depends on the reason. 

In most cases, maxed-out credit cards signal that you have more debt than you can afford. Maxed-out cards could indicate that you need to look into a debt relief program. Credit scores recognize that charging too much on your cards is often a sign of financial trouble. As a result, maxing out your credit cards can cause your credit score to decline.

On the other hand, a maxed-out card could mean that you were able to use an available credit card to cover a financial emergency. If you’ve got a plan to pay down the balance, you might not need to worry about it.

Let’s go over the details.

What Does It Mean To Max Out a Credit Card?

Maxing out a credit card means you've reached your card's limit (or very close to it). 

Suppose you have a card with a $2,500 limit. You could purchase up to $2,500 of goods and services. Or you might transfer an existing balance to the card, up to $2,500. 

Once you’ve maxed out a credit card, you've charged as much as you are allowed. 

In this case, your card would be maxed out if you charged $2,500 on it.Once this happens, you can no longer make purchases, transfers, or take cash advances until you pay down your balance. 

If your credit card has a credit limit—and most do—this limit represents how much purchasing power you have. Different credit cards have different limits. Generally, you can't exceed your credit limit unless you've opted to allow your card issuer to permit over-limit transactions. In that case, you'll probably have to pay an over-limit fee. Charging over the limit could also trigger an interest rate increase. 

You could also face an over-limit fee if you max out your card and then interest charges push your balance over the limit. 

You May Like These

#MyFreedomDebtStory: The Story, the Contest, and the Winners

Best Ways to Get Debt Relief

Credit Card Debt Relief

When It’s Okay to Max Out Your Credit Cards

Generally speaking, maxed-out credit cards aren't ideal. But sometimes, it can make sense to max out one or more credit cards.

1. You're transferring a balance from another card to save on interest

When you do a credit card balance transfer, you move it from one credit card to another. Typically, people do this when they can get a low introductory annual percentage rate (APR). 

Transferring balances could result in maxed-out credit cards. However, some balance transfer cards don't allow transfers right up to your credit limit. They might require you to leave a cushion of 10% to 25% of your limit. 

A balance transfer could be a good move if you're able to get a 0% APR and pay off the account before the promotional rate expires. 

2. You have a plan to pay off the balance 

Maxing out a credit card could also be okay if you have a plan to pay off the balance. You might max out a card and pay it off the same month if you need to make a large purchase and want to earn rewards for what you spend. 

For example, say you have a cashback credit card with a $3,000 limit that pays 2% back on eligible purchases. You want to buy new furniture, and you know you'll be getting a $3,000 tax refund. 

Instead of using your refund to pay, you put the $3,000 furniture purchase on your card, maxing it out. You earn $60 in cash back on the purchase. When you get your tax refund a week later, you use that to pay off the card balance in full.

3. You have an unexpected expense 

An emergency fund could help you avoid a financial setback, yet 45% of Americans say they don't have the cash to cover a $400 unexpected expense. If your emergency fund is still a work in progress, you may have to max out a credit card in an emergency. 

If you must max out a credit card because you need to use it to cover an unplanned expense, look into 0% APR balance transfer offers. If you qualify, you could end up paying less interest. You might pay a fee for the balance transfer but still may be able to reduce your interest charges over time.

4. You need to preserve your cash

Maxed-out credit cards can be preferable to draining your cash reserves in certain situations. 

Suppose that you lose your job. You apply for unemployment, but it'll take up to a month for those benefits to kick in. You could draw on your cash to cover expenses in the meantime. But your emergency fund might only go so far.

In this scenario, you may be better off relying on credit cards temporarily to cover bills and day-to-day living expenses until your unemployment benefits start.

This way, you can save the cash you do have for things you can't charge, like your mortgage payment.. 

Why Maxed-Out Credit Cards Are Bad

Maxed-out credit cards can be problematic for a few reasons, starting with the fact that they represent debt. Charging the maximum possible amount on your credit cards could mean that you have more debt than you can afford. It's harder to work toward other financial goals when you have a high-interest credit card balance that you must make monthly payments on. 

Aside from that, having maxed-out credit cards can have other negative consequences: 

• You won't be able to use cards.

• Your credit score is likely to suffer. Credit utilization makes up 30% of your FICO credit score, which is the score used by most lenders. Using up most of your available credit limit, even temporarily, could cause your score to drop.

• Interest will accrue. Unless you're maxing out a card that has a 0% introductory APR for purchases or balance transfers or maxing it out and paying it off immediately, you'll owe interest on the balance. The higher your card balance and APR, the more interest you'll have to fork over.

• Fees may apply. You could be charged over-limit fees for exceeding your credit limit, and higher penalty interest rates may also kick in. 

So is it bad to max out your credit card? The short answer is yes, it can be.

What Happens When You Max Out Your Credit Card?

The most immediate side effect of maxed-out credit cards is that you can't use your card to make new purchases. Before you can charge anything else, you'll need to pay down the balance. And you'll likely pay interest and finance charges unless you're able to pay the balance off in full before the next billing cycle begins. 

Also, expect your credit score to suffer some damage. 

Now, what happens to maxed-out credit cards if you don't pay? 

If you fail to pay the minimum due on time, your credit card company can assess a late fee. After your account is 30 days late, the credit card company is likely to report you to the credit bureaus. Late payments do even more damage to your credit score. 

When a credit card account continues to go unpaid, it eventually becomes delinquent. At this point, your credit card company could assign your account to in-house collections or sell it to a debt collection agency. Once that happens, you may be subject to: 

• Debt collection letters mailed to your home

• Collection calls at work

• Collection calls at home

• Text messages regarding the debt 

The Fair Debt Collection Practices Act (FDCPA) extends certain rights to protect you from unfair debt collection practices. For example, you can tell debt collectors not to call you at work if your employer doesn't allow incoming phone calls during work hours.

However, the FDCPA does not apply to original creditors like your credit card company, and it may contact you aggressively. 

In addition, the FDCPA doesn't prevent a debt collector or creditor from suing you over unpaid debts. So if you have maxed-out credit cards in collections, it's usually not a good idea to ignore them. Instead, you can explore solutions for managing outstanding debt, including credit counseling, debt settlement, or debt relief.

What Can You Do When Credit Cards Are Maxed Out?

If you have maxed-out credit cards, there are a few ways you might consider handling them. The best option for you can depend on your financial situation.

For example, you might consider a credit card hardship program if you're temporarily unable to keep up with your payments because of a job loss or illness. Your credit card company may be willing to temporarily lower your interest rate and waive fees to help you get caught up.

You could request a credit limit increase if you're worried about the impact maxed-out credit cards might have on your credit score. Keep in mind, however, that raising your credit limits could work against you if you increase your balances.

Applying the debt snowball or the debt avalanche method of debt payback could help you pay down maxed-out credit cards faster if you have room in your budget to pay extra. The debt snowball method involves paying off debts from lowest balance to highest, while the debt avalanche advocates paying off debts from highest APR to lowest.

When the issue is that you have trouble with your spending, you might need a different solution. Credit card counseling and perhaps a debt management plan (DMP) might be appropriate for you. Enrolling in a DMP means you'll have to close your credit card accounts. But it could be a good option if paying off your debt is the primary goal.

If even paying the minimum due is unaffordable, consider other possibilities like debt relief or bankruptcy. The most important thing is to address your maxed-out credit cards and get your finances back on track.