Maxed Out Credit Cards: Why It's Bad and What to Do About It
- Maxed out credit cards is a sign of financial trouble.
- Maxing out your credit cards causes your credit score to drop.
- Credit counseling or debt relief can help you regain control.
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Is it wrong to max out your credit card? That depends on the reason. In most cases, maxed-out credit cards are a sign of serious financial trouble. Credit scoring models recognize this, and maxing your credit cards out can cause enormous downgrades to your credit scores.
What Does it Mean to “Max Out” a Credit Card?
"Maxing out" a credit card means that you've reached your card's limit. 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.
Once you reach your card's limit, you won't be able to add to your balance. 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. If you have multiple credit cards, each might have a different limit.
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 probably pay an over-limit fee or trigger an interest rate increase. You may also face an over-limit fee if you max out your card, and then your finance and interest charges push your balance over the limit.
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
Balance transfers can save you money if you can get a better rate. When you transfer a balance, you move it from one credit card to another to get a lower introductory annual percentage rate (APR).
Transferring balances can result in a maxed out credit card if you're shifting them all to a single card. However, most balance transfer cards do not allow transfers to your credit limit. They typically 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're shopping with a plan
Maxing out a credit card could also be okay if you know that you'll be able to pay the balance off in full before interest begins to accrue. You might do this if you need to make a large purchase and 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 purchases. You want to buy new furniture, and you know that you'll be getting a $3,000 tax refund.
Instead of using your refund to pay, you charge $3,000 in new furniture to your card, maxing it out. You earn $60 in cashback on the purchase. Meanwhile, you get your tax refund a week later, which you then use to pay off the card balance in full.
3. You have an unexpected expense
An emergency can help 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 have maxed out credit cards because you used them to cover an unplanned expense, consider a 0% APR balance transfer offer. You might pay a fee for the balance transfer. Still, you might be able to pay off the balance over time without interest charges.
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 will 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 if you're not sure how quickly you'll be able to get back to work.
In this scenario, you may be better off relying on credit cards temporarily to cover bills and day-to-day living expenses until you're drawing a regular paycheck again.
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. It is harder to work toward other financial goals when you have a high-interest credit card balance.
Aside from that, having maxed out credit cards can have other negative consequences:
You won't be able to use the card.
Your credit score may suffer. Credit utilization makes up 30% of your FICO credit score, the scoring model used by most lenders. Borrowing against more 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. And 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 maxing out credit cards is that you can't use your card to make new purchases or cover an emergency. 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.
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 can report you to the credit bureaus. Late payments do even more damage to your credit score than high credit utilization.
When a credit card account continues to go unpaid, it eventually becomes delinquent. At this point, your credit card company can 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 option you choose 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 can also 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 method or the debt avalanche 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 poor spending habits are the issue, you might need a different solution. Credit 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.