What Happens When You Max Out A Credit Card And What Can You Do About It?

FT Contributor  | 

Your credit card is “maxed out” when you are very near, at, or over your spending limit.

For instance, say you have a credit card with a $5,000 limit that currently has $4,500 on the card, leaving you $500 in available credit. If you make a $500 purchase, you have maxed out your card, since you have now hit the $5,000 spending limit. If you take too long to make a payment on your card, the interest generated by your card’s balance may push you right past the limit, likely incurring a credit limit fee in the process.

Maxing out your credit card can have several other severe financial repercussions as well. While you can work to fix the situation after you’ve hit your credit limit, it’s always advisable to avoid maxing a card out in the first place.

Effects of Maxing Out Your Credit Card

Maxing out a credit card can have many financial consequences, some in the short term, and others over a longer period of time.

On Your Credit Score

One of the biggest negative consequences of maxing out your credit card is the effect it can have on your credit score. One of the primary factors that go into calculating your score is your credit utilization ratio. For example, if you have $2,000 in credit and you’ve only spent $1,000, you have a 50% credit utilization ratio.

When you max out your credit card, it raises your overall credit utilization ratio, lowering your credit score as a result. This can have long-term effects on the health of your finances, as it can lead to more money spent on repaying a mountain of debt and its accruing interest.

As a caveat, it should be noted that if you max out your credit card and then pay off a significant portion of the balance all before your next statement, the maxed-out balance shouldn’t be reported to the credit bureaus.

On Your Account

Maxing out your credit cards is a sign of unhealthy finances, and it’s a signal that many lenders don’t like to see. If you have a maxed-out credit card that raises your credit utilization ratio and lowers your credit score, it may lead to a denial when you apply for a personal loan.

This can make it difficult to purchase a house or even a vehicle, both of which typically require a loan. In extreme cases, having a maxed-out card can even lead to a lender cutting off your existing credit line by closing your credit card account entirely.

On Your Rates

While the obvious concern with a maxed-out credit card is paying off the existing balance before it generates too much interest, it can have a more subtle effect on future loans as well.

For instance, having a maxed-out card can lead some lenders to increase the interest rates on a loan or even impose a penalty interest rate if you want to open up a new line of credit in the future. These interest rates can run upwards of 25% to 30% and, while not necessarily permanent, can serve to exacerbate an existing financial problem.

On Your Finances

Finally, maxing out credit cards can have far-reaching repercussions on your finances as a whole. The mere act of maxing out your line of credit is indicative of unhealthy spending behavior, while a full balance can soak up significant amounts of cash that you may need elsewhere as you attempt to pay down your debt.

In addition, the stress and anxiety of a maxed-out card can have further negative reverberations throughout your mental and physical health and wellbeing.

Steps to Take After Maxing Out Your Credit Card

Fortunately, if you’ve maxed out a credit card, there are several steps that you can take to help right the ship of your finances.

Stop Spending

Even if you have multiple credit cards, as soon as a single card becomes maxed out — and even sooner if possible — you should take steps to curb your spending. Simply shifting to another credit card or opening up a new line of credit will only aggravate the issue, as it will add to the snowball effect of your mounting debt and associated interest payments.

Create a Budget

Once you’ve stopped spending, create a lean, mean budget, and do your best to stick to it strictly. At least temporarily do the best you can to eliminate all “wants” — things like streaming services and eating out — and focus exclusively on absolute needs, such as food staples and shelter. The goal should be to free up as much money as possible on a regular basis so that you can funnel that excess cash towards your maxed-out card.

Make a Repayment Plan

As you craft your budget, start with your basic income and expenses. Once you have those covered, begin to factor in a repayment plan with your remaining income. Consider how much money you can put towards debts each pay period and then isolate the debt you should pay off first. Typically this will be your maxed-out card. However, once your balance shrinks a bit, you may want to redirect your funds towards paying off whatever credit card you own with the highest interest rate.

Look for Extra Income

If you find that even with a strict budget you can’t afford to put much money towards your debt, it may be time to look for an additional source of income. There are numerous side hustles available including:

  • Babysitting.
  • Rideshare driving.
  • Dog walking.
  • Freelance writing.
  • Website building.
  • Graphic design.

Sites such as UpWork and Fiverr can be instrumental in locating gig economy jobs that suit your particular talents.

Avoid Maxing Out Your Cards in the Future

Once you’ve fixed your credit situation, it’s essential that you take one final step in the name of your long-term financial health. Take a step back and consider what actions caused your current situation to occur. Was it a one-time scenario or were there regular, unhealthy spending habits that slowly filled your card’s balance?

Once you identify the root cause, take steps to address it so that you can proactively avoid maxing out any more cards in the future.


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