Most credit cards come with a credit limit, which is the highest outstanding balance you’re allowed to have on your credit card. Your credit limit is based on a few factors: your credit score, your income, and the credit card itself.
Spending all the way up to your credit limit is known as maxing out your credit card. Even though your credit card issuer allows you to spend all the way up to your credit limit, it’s generally better that you don’t.
What Happens When Your Credit Card is Maxed Out
Your credit score is based on how much of your credit is being used, which means that maxing out your credit card can hurt your credit score. This is especially true if all your other credit card are maxed out too.
If you can’t afford to pay off your balance, you’ll pay a high amount of interest on your credit card. Your monthly finance charges are based on your credit card interest rate and your credit card balance. The higher your credit card balance the more you’ll pay in interest.
Some credit card issuers may close your credit card if you max out your credit card. You’re even more at risk if you go over your credit limit. Running up a large credit card balance makes you look like a risky borrower, even if you can afford to pay off the balance right away. The most responsible thing is to stay below our balance and avoid maxing out your credit card.
Maxing out the balance on a rewards credit card leaves you without any room to keep earning rewards. Since you have no available credit, you can’t make any purchases. Plus, paying interest on a maxed out balance negates any rewards you’ve already earned on your credit card.
How to Deal With a Maxed Out Balance
If you’ve already have a maxed out credit card and you’re wondering what you can do about it, here are a few tips.
Stop using your credit card. Continuing to make new purchases on your credit card keeps your balance high. Even if you’re making large payments on your card, the new charges will make it tougher to bring your balance down. You don’t have to close your credit card. In fact, that may make damage your credit score even more. Just put your credit card away until you’ve completely paid off your balance.
Make larger payments to your balance. Your credit card issuer only requires you to pay the minimum on your credit card. This is a small percentage of your balance and just enough to keep your account in good standing. Paying the minimum won’t bring your balance down fast enough. The best way to take care of a maxed out credit card is to make large, lump sum payments to your balance as often as you can until you pay the balance down.
Transfer your balance to another credit card. Moving your balance to a credit card with a higher credit limit can give some relief from a maxed out credit card. If you don’t have a credit card with a high enough limit, you can transfer just some of the balance. Splitting up your balance means you’re using less of your available credit and will typically help improve your credit score.