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 why it happens. 

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 using up your credit limit is often a sign of financial trouble. As a result, maxing out your credit cards usually has a significant negative impact on your credit score.

On the other hand, a maxed-out card could mean you used a 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.

Freedom Debt Relief isn't a credit repair organization and doesn't provide or offer services or advice to repair, modify, or improve your credit

What Does It Mean To Max Out a Credit Card?

Maxing out a credit card is when you reach your card’s credit limit. The credit limit is the maximum balance your card can have. You can generally find the credit limit in your online account and on your billing statements.

If your credit card has a credit limit—and most do—this limit represents how much spending power you have. A $5,000 limit means you can spend up to $5,000 on your card. Maxed-out credit cards can be difficult to pay off, and a credit card debt relief program is sometimes the most effective way out in this situation.

Your online card account also shows your available credit, which is the difference between your current balance and your credit limit. Available credit is basically how much spending power you have left on your card at any point.

Everything counts toward your credit limit, including purchases, balance transfers, interest, and fees. Let’s say your card has a balance of $4,900 and a credit limit of $5,000. You’re near your credit limit, but not quite there yet. The credit card company then charges you $125 in interest. That fee brings the balance to $5,025—and maxes out your credit card.

Once you’ve maxed out your card, you usually can’t make purchases, transfer balances, or take cash advances until you pay down your balance. There are, however, a couple of exceptions.

Flexible spending credit cards

A flexible spending credit card gives you a bit of a credit buffer. The credit card issuer evaluates how you use your card. Based on that, it decides whether to approve spending that would push your card over the limit.

But since the card issuer makes these decisions case by case, there’s usually no way to be completely sure an over-the-limit transaction will go through.

Opting into over-the-limit transactions

Some credit card issuers may let you opt into over-the-limit transactions—and the fees that come with them. If you agree, you can go over your credit limit and the card issuer charges you an over-the-limit fee. Going over the limit could also trigger an increase in your card’s interest rate.

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When It’s Okay to Max Out Your Credit Cards

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

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

When you do a credit card balance transfer, you move a balance 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 require you to leave a cushion of 10% to 25% of your limit. 

A balance transfer could be a good move if you get a 0% APR and can 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 solid 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 cash back 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 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 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 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 several reasons. For starters, credit card balances are debt. And if you’ve charged the maximum amount on your credit cards, you may have more debt than you can easily pay back. It's harder to work toward other financial goals when you have a high-interest credit card balance to pay every month.

Maxed-out credit cards can have other consequences.

Interest charges add up

Credit cards are one of the more expensive ways to borrow money. The average interest rate is over 20%, and some cards charge over 30%. The higher your card’s balance and interest rate, the more money you need to fork over to get rid of the debt.

There are a couple of exceptions. If your maxed-out card has a 0% intro APR on purchases or balance transfers, you may avoid interest for a limited time. You could also avoid interest if you pay off your maxed-out card’s full balance by the due date. But in most cases, maxed-out cards translate to costly interest charges.

Your credit score is likely to suffer

Getting too close to your credit limit is considered risky by the credit bureaus, and it’s not good for your credit score. A big part of your score is your credit utilization—a fancy term for your card balances compared to your credit limits.

To calculate your credit utilization, divide your card’s balance by the credit limit. Let’s say you have a card with a balance of $9,000 and a credit limit of $10,000. Your credit utilization is 90% (9,000 divided by 10,000). The Consumer Financial Protection Bureau (CFPB) recommends keeping credit utilization under 30%, although there’s really no perfect number. The general rule is that lower is better.

Your credit utilization gets updated monthly based on your current card balances. Even if you have maxed-out cards, you could improve your credit score quickly by paying down what you owe. You may see an impact in as little as one month.

You won’t be able to use your maxed-out cards

You’ll need to pay down your balances before you can use your cards again. If you rely on your credit cards, this could be inconvenient. It may be for the best, though, since it keeps you from getting deeper into credit card debt.

Fees may apply

If you’ve agreed to over-the-limit fees, those could kick in right away when you exceed your credit limit. Your card issuer might also charge you a higher interest rate. And if you have trouble making minimum payments because your cards are maxed-out, you could be charged late fees. Late payments can also damage your credit score.

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 have to pay down the balance. And you'll likely pay interest and finance charges unless you can 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 don’t pay the minimum due on time, your credit card company usually assesses 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

• 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 depends 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 charge more and risk hitting the new limits.

If 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. Enrolling in a DMP means you 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. Learn how Freedom Debt Relief works for more information. The most important thing is to address your maxed-out credit cards and get your finances back on track.

Strategic debt payoff methods

If you have room in your budget to pay extra on your credit cards, consider the debt snowball or the debt avalanche methods. These are popular strategies to deal with multiple debts. Here’s how each method works:

• Debt snowball: You pay off cards from the lowest balance to the highest. Make minimum payments on all your credit cards, and put extra money toward the card with the lowest balance. When you’ve paid off that card, move on to the card with the next-lowest balance, and so on.

• Debt avalanche: You pay off cards from the highest interest rate to the lowest. Make minimum payments on all your credit cards, and put extra money toward the card with the highest APR. When you’ve paid off that card, repeat the process with the card with the next-highest APR.

The debt snowball works well as a motivational tool. You pay off cards sooner with this method, and notching those quick wins could help you keep going. The debt avalanche typically saves more money, because you’re getting more expensive debts out of the way first.

The best method depends on you and your debt situation. If there’s a big difference between the interest rates on your credit cards, then the debt avalanche probably makes more sense to save on interest. If you’re feeling overwhelmed by all the debt you have, then paying off a card quickly with the debt snowball might be just the boost you need.

To see which maxed-out card you’ll pay first, make a spreadsheet with the details of your credit cards. Include each card’s balance, minimum payment, and APR. Then, sort your cards by either highest APR or lowest balance, depending on which debt payoff method you chose.

Sometimes, credit card debt is too much for either the debt snowball or debt avalanche to work effectively. In this situation, debt settlement could be the right path to getting free of debt. Instead of paying in full, you (or a debt relief company) negotiate with your creditors to settle your debt for an amount you can afford.

Preventing Future Maxed-Out Situations

With a little financial planning, you can avoid maxing out your credit cards and needing debt relief services in the future. Here’s what to do:

• Build an emergency fund. Set aside money in a special emergency savings account after each paycheck. Start with a goal of $500, then $1,000, and eventually, three to six months of living expenses. If you have any unwelcome financial surprises, you can pay in cash instead of relying on credit cards.

• Set your own personal credit limits, below your actual limits. Maybe your card has a $5,000 limit, but you decide you’ll stay under $1,500. You won’t come anywhere close to maxing out your card if you stick to that limit, and you’ll also protect your credit score.

• Lock your card if the balance gets too high. Many credit cards have a lock and unlock feature. If you’re at or near your personal credit limit, lock your card so you can’t use it, even by accident.

• Use budgeting tools and apps to track spending. You don’t need to do it all on your own. Pick a budgeting tool you like to help you stay on top of your spending.

• Create spending rules and accountability systems. These can be anything that helps you avoid overspending. For example, you could set a rule that you only use your credit card if you have enough in your checking account to cover the purchase.

• Don’t save your card on shopping sites. You could have an easier time cutting back on online shopping if you need to manually enter your card info every time.

Even if you have several maxed-out credit cards, there’s always a way out. If you need help with your debt, a professional debt settlement company could negotiate with your creditors on your behalf.