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What Happens When You Max Out Your Credit Card?

| Money Rates Columnist
min read

businessman-calculator-paper-laptopCredit cards are powerful financial tools. They make it easy to finance large purchases and convenient to pay for everyday expenses.

However, a maxed-out credit card can lower your credit score, result in fees and penalties, and make it harder to get a mortgage or loan.

Keep reading for answers to common questions about maxing-out your credit card and what to do to improve your personal finances.

What Happens When You Max Out A Credit Card?

Have you ever looked at your statement and wondered, Why is my available credit zero?

The answer is that you have a maxed-out card.

Most credit card companies provide customers with a limited line of credit. Once you have charged purchases up to that limit, the following things generally happen:

  • Your card will be declined for future purchases until you pay down a portion of the balance.
  • You could be assessed a fee or a penalty interest rate if you exceed your limit.
  • Your credit score could go down.
  • Your minimum payments could go up.

In short, a maxed-out credit card could end up costing you money and limit your spending options.

How Does A Maxed-Out Card Affect Your Credit Score?

A maxed-out credit card can significantly increase your credit utilization ratio. That may, in turn, lower your FICO score and make it more difficult to be approved for other credit cards, private student loans or a mortgage.

A FICO score, which is the credit score used most often by creditors, is calculated using five pieces of data, weighted in the following way:

Percentage Credit Score Factor Notes
35% Credit History Payments within 30 days of the due date are considered on time.
30% Credit Utilization Utilization is the percentage of available credit that you actually use. Essentially, it's the amount owed.
15% Length of Credit History It's generally not a good idea to close older accounts.
10% New Credit Applying for credit will generate inquiries on your report and it will cause your score to drop temporarily. If your report shows a steady increase in the number of accounts, the amounts owed, and the percentage of credit that you're using, it can indicate that you're spending beyond your means and heading for trouble.
10% Credit Mix Not all credit is created equal. Installment financing like mortgages, personal loans and auto loans carries more positive weight and can improve your mix. On the other hand, holding nothing but credit cards can lower your score.

 

It's that second factor - credit utilization - that is affected when you max out a credit card.

When someone owes a lot money, credit card issuers may worry the person is financially overextended. In other words, it can be a red flag that you don't have enough income to pay your bills each month.

Ideally, you'll want to keep your balances lower than 30% of your total available credit. This percentage is known as a credit utilization ratio. If you can keep your credit utilization ratio below 10%, that's even better.

For example, someone with credit cards that have total credit limits of $10,000 should keep their balance below $3,000 and preferably below $1,000. That doesn't mean you can't charge more to your card. However, you should try to pay down the balance each month.

Is It Bad to Max Out a Credit Card and Pay It Off?

It's always best to avoid maxing out your credit cards if possible.

Credit card companies may report balances to credit bureaus at different times of the month. If they report account details at a time when you've maxed out your credit limit , it could negatively affect your credit score.

Here's two reasons why, if you do max out your card, it's good to pay off the balance or make a payment as soon as possible:

  1. Over-the-limit fees

    Once interest charges are added, your balance may go above your credit limit and trigger over-the-limit fees.

  2. Higher interest rate charges

    If your card has a promotional or introductory APR, you could lose that and be charged a much higher interest rate should you exceed your credit limit.


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How Many Times Can I Pay My Credit Card a Month?

Most credit card companies don't limit how many monthly payments you can make, but you want to be careful not to send in too many. If you immediately pay off everything you charge, you may never have a balance reported to the credit bureaus.

While it may seem like to a good thing to look like you don't have credit card debt, some lenders like to see that you are using your credit and making timely payments. If you make payments too quickly, it may appear that you simply aren't using your credit cards at all.

Does Making Multiple Payments Increase Your Credit Score?

Not necessarily. The number of payments you make is not reported to credit bureaus, and they won't directly impact your credit score.

And if you're wondering, Does credit limit reset after payment? that doesn't happen either.

However, if you have a high balance, making multiple payments may help ensure you have a lower credit utilization ratio at whatever time your credit card issuer reports your balance to credit bureaus. That can help you attain good credit. Plus, you may save money by avoiding interest charges which can also help lower your monthly minimum payments.

Maxing out your credit card is never a good thing.

If you've hit your credit limit, it's time to stop charging purchases until you can pay off a portion of your balance. If you're having trouble getting out of debt on your own, don't be afraid to seek help from a non-profit credit counseling agency or credit counselor. Another alternative it to transfer some or all of your balance to a balance transfer credit card.

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