Maxing out your credit card is generally a bad idea. While you might want to do it in emergencies, it might not work out well for you under normal circumstances.
What Happens When You Max Out Your Credit Card?
The following are some of the consequences that occur when you max out your credit card.
Damage To Your Credit Score
The first consequence is usually damage to your credit score. While using some of your credit (up to around 35 percent) can be helpful, using more than that regularly can cause lenders concern. Why would you need to borrow so much?
Lower credit scores are better because they imply smaller interest charges. However, if you keep maxing out your cards, lenders will ask for more interest to cover their risk, and that only makes you poorer.
Interest Charges
Maxing out your credit card also increases the risk of interest charges on your account. If you borrow money from the lender for longer than permitted interest-free, you’ll start to incur significant fees.
Credit cards aren’t a cheap form of borrowing. Interest rates are often in excess of 20 percent, which is more than car loans, mortgages, or other secured lending products. That means you’ll need to pay off the principal plus interest. And since that figure will already be high, the total amount you’ll wind up paying can be unsustainable.
Excessive Debt
On this point, maxing out your credit card can also lead to excessive debt. After a while, your income simply can’t service what you owe. You’re unable to meet your other obligations at the same time, and you start falling into arrears.
This type of debt is stubborn, and it can take years to pay off. Many people spend a decade or more trying to cut the money they owe back to sustainable levels but fail. Eventually, a proportion enters bankruptcy to write off the debt, with further damage to their credit score and ability to borrow in the future.
Limited Credit Access
Related to this last point, if you max out your credit card, the amount of money you can take out through other channels is limited. Credit agencies share information with each other and lenders. As such, if you have a lot of credit card debt, it may impede you from taking out a mortgage. Likewise, you may struggle to get a loan for a car because lenders will perceive your existing debt burn as high.
Of course, taking out additional credit when you max out your credit card isn’t a shrewd financial move so preventing additional borrowing might be a good thing. But it does make your life less flexible. You’re unable to make large purchases, even if they might be financially smart.
Financial Stress
Finally, maxing out your credit card can cause financial stress. You may get to the checkout and receive a bunch of transaction response codes telling you that you can no longer use your card because you’ve run out of money. You can also start to feel the physical effects of always being on the edge financially. It becomes harder to let down your hair and just relax.
What To Do Instead Of Maxing Out Your Credit Card
So, as we’ve seen, maxing out your credit card isn’t the best option. So what should you be doing instead? Glad you asked. Here are some of the things you can try.
Build Your Emergency Fund
Instead of spending and “living for the moment,” build an emergency fund. Have some cash in the bank you can draw on when times get tough or you have a sizable expense you need to pay.
Your emergency fund should be enough to cover about three months of bills. Reward yourself for saving the money by allowing yourself to feel good about the security it offers. Remember, you can always have fun again in the future when you are in a better place financially.
Monitor Your Credit Usage
You should also be careful about how much credit you use on your account. Try to keep it below 35 percent of your maximum.
This will have two effects. First, it will keep the absolute amount of debt you need to pay low. You won’t have a huge bill you need to pay off every month. And, second, it will send a positive signal to rating agencies and lenders. It will show that you are within reasonable boundaries for credit and that you have plenty of money to pay your expenses.