Credit cards can be dangerous for consumers because they allow such seamless access to debt. This is evident in the fact that over half of adults in the United States have maxed out their cards.
For those unfamiliar with this, here’s what happens when you max out a credit card.
Your Credit Utilization Will Skyrocket
Credit utilization is one of the important metrics that goes into determining your credit score. It’s simply the relationship between your credit limit and the amount of credit you’re currently using.
Most experts recommend that you keep your credit utilization ratio at or below 30 percent.
When you’ve maxed out your credit card, your credit utilization for that card will be at 100 percent. This won’t look good to the credit reporting agencies, which will assume you’re not making headway in paying back that debt.
Your Card Might Get Cancelled
It’s not unheard of for credit card companies to cancel or close accounts that have hit their credit max. The lender might just make the assumption you’re not in a good financial place and are unlikely to pay back any more money you lend to them.
In this scenario, they might just decide it’s not worth it to keep lending money. This is more likely to happen if you’re consistently having a balance near the credit limit.
You need to remember that the credit card company closing your account doesn’t mean you don’t have to repay the debt. You still owe that money, you’re just not able to keep using credit on that card as you pay it down.
You Can’t Make More Purchases Until You Pay Down Some Balance
When you max out your credit card, that’s it. It’s the point where the lender has decided they’re not going to let you make any more purchases. So, when your card has hit its maximum, you won’t be able to make further purchases with it until you pay down some of that balance.
It’s likely that your card got maxed out in the first place because you’re having a tough time paying down your balance. If this is the case, it’s time to take action. You can try to refinance your card by transferring its balance or get its limit raised.
You Might Take a Hit on Your Credit
Your credit report is simply a way of keeping track of your history as a borrower. This is valuable information for credit card companies and other financial institutions. They want to know how likely you are to pay them back if they give you money. This is why people with lower credit scores have to pay higher interest rates. It’s a way for the lender to hedge against the chance of not getting paid back.
Your credit score is important because it’s going to determine how easily you’re able to assess credit, and at what terms. Taking a hit to your credit score after maxing out your card probably means you’re going to have a more difficult time getting more credit.
You Might Have to Pay Penalties
When you’ve maxed out your credit card, there’s a good chance you’re not going to be able to pay down the balance. There are often fees associated with credit cards when you miss payments.
When the penalty kicks in, you’re going to have to deal with an even higher annual percentage rate (APR). It’s a good idea to at least make the minimum payment in order to avoid having to deal with these penalties.
Maxing out a credit card isn’t something you want to be doing habitually. But life can sometimes lead you there. It’s important to know what happens when you max out a credit card.