Is it Okay to Max Out a Credit Card?

Cutting a maxed-out card may protect against accidental usage.

Cutting a maxed-out card may protect against accidental usage.

Maxing out your credit card to buy the latest fashions, coolest shows and hottest technologies may sound fun, but be prepared for very negative financial repercussions. In general, high credit card debt brings about unfavorable limits to your future buying power. There are rare exceptions when heavy card use makes sense.

Credit Score

A primary drawback of maxing out your card is the negative impact high debt utilization has on your credit score. Your debt-to-credit-limit ratios account for 30 percent of your FICO rating, or credit score, according to MyFICO. This is the ratio showing how much of the credit available on your credit cards you have used. If you literally max out a card, you have a 100 percent ratio, which significantly hurts your score. Ratios even close to 100 percent are bad for your credit. Credit scores are one of the most important tools used by lenders to decide whether to issue you new credit and at what rates, so it's worth trying to maintain a good score.

Creditor Response

If you apply for a new loan or credit card, the lender looks at more than just your total score. Normally, lenders run your full credit report and review your various balances and payment history for any red flags. Maxed-out cards are a major concern for a new lender as it appears you have no spending discipline and are trying to get new credit because you are desperate. Some of your existing card issuers might also see that you have a maxed-out card and lower your limits to keep you from taking on more debt than you can repay. This also raises your debt-to-limit ratios since your amount of available credit falls. The maxed-out card provider might decide to lower your limit as you pay down the balance, too.

Other Problems

Maxed-out cards present other problems as well. The higher your balance on a card, the more your minimum monthly payment. This makes it more difficult to keep up with payments and limits your free cash flow going forward. Plus, higher balances take longer to pay off, which means you also pay more in interest over time. Finally, walking around with a maxed-out card in your wallet is risky. One wrong swipe of the card could send you over the limit, bringing on overlimit fees and higher interest rates. Similarly, an automatic payment you forget about could send you over.

Positive Spin

Obviously, there are a lot of reasons it is not OK to max out a card. One scenario in which maxing out a card might make sense is when you get a great promotional rate and use it to pay off other balances. Card providers routinely offer new borrowers with decent credit opportunities to transfer balances with a zero percent annual interest for the first six to 18 months. If you have a $10,000 limit and use most of it to move debt from cards that have rates of 15 to 25 percent, you can save a lot in interest. This is most sensible when you know you can quickly pay down the balance to avoid interest charges on the new card.

 

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