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Credit cards can be really helpful to take care of big purchases and unexpected expenses. The trouble comes when charges get racked up to the point of maxing out your credit line. A maxed out credit card is one that has gone over or is close to being over the assigned credit limit.
For example, if you have a credit line of $1,500 and your balance on that card is $1,500, your card is considered maxed out. Once your APR is applied to this balance, you will be over your credit limit. And even if you pay the amount down before your APR is applied, you may still find your balance is over the limit due to fees.
How to know if your card is maxed out
If you are keeping tabs on your credit card spending, then you will already have an idea of when your card will max out. However, if you’re not keeping track of your purchases, you will probably only discover that your card is maxed out when you try to make your next purchase. Many credit card companies will decline transactions that go over your credit limit.
If your credit card issuer doesn’t decline over-limit transactions, you will know that you’ve gone over the limit when you get your credit card statement. You’ll probably see a balance that is much higher than expected, as going over your credit limit involves fees that can get as high as $40.
How does a maxed out card affect your credit score?
A maxed out credit card causes issues with your credit utilization, which makes up 30 percent of your credit score. Credit utilization has to do with how much credit you have available and how much credit you have used. It is often referred to as your debt-to-available-credit ratio.
It is recommended that you only use 10 to 30 percent of your available credit at any given time. So, if your total amount of available credit is $1,500, you would only want to use $150-$450 in order to keep your credit utilization in a good place. Maxing out your cards means your credit utilization is at 100 percent .
Going over the 10 to 30 percent recommended usage may indirectly lead to some other credit score issues. Payment history makes up the largest percentage of your credit score calculation, coming in at 35 percent. If you’re making your minimum payments on time for every billing cycle, you’re in a good place. However, if you find your minimum payment for a maxed out card is out of reach, you may have an issue. Missing just one payment or making one late payment will have an effect on your payment history and cause your credit score to decrease.
If you want to avoid having issues with your credit score, it’s best to pay off your monthly balances in full. If you pay off your balance before your statement bill is due, you’ll be able to avoid dealing with interest. Paying before your statement is issued will help you avoid your high balance being factored in to your credit utilization because it won’t have been reported to the credit bureaus yet.
What to do about a maxed out card
If you’ve maxed out your card on a large purchase that you have a plan for paying off, you should be okay. Just make sure that you are following your repayment plan. However, if you’ve maxed out your card unexpectedly, you’ll need to act quickly to get your credit back on track. You could start by checking with your creditor to see if they can raise your credit limit. This may give you a chance to pay off part of the balance without having to deal with fees. Just know that this kind of request may cause a hard inquiry into your account.
Having one maxed out card is usually easy to deal with if you have a repayment strategy. If you have maxed out multiple cards, however, there may be some deeper issues to address. It may be time for you to stop using credit for a while until you can get things back on track. If you feel like that will be difficult, put your card in a secure place out of reach. Some credit card issuers will also allow you the option to temporarily freeze your account.
The next step will be working on a repayment plan for the debt you’ve accrued. If you have multiple maxed out cards, prioritize the higher interest rate debt. You may also want to look into the possibility of doing a balance transfer or getting a personal loan to help you get your debt under control. If this feels overwhelming, know that you’re not alone and you have the option to work with a debt counselor. The National Foundation for Credit Counseling offers many resources to help.
How to avoid maxing out your card in the future
An important step to avoid a maxed out credit card is creating a budget for how you will spend going forward. Take a look at your past credit card statements to see what kind of spending you’ve been doing. Are there places where you can spend less or not at all?
Once you have an idea of how you want to spend going forward, it’s important to track your spending to make sure you are sticking with the plan. There are helpful spending tracking apps that can make this easier for you. Part of tracking your spending also includes keeping tabs on your credit report to make sure your accounts are in good standing. Bankrate has a tool to help you do that.
A great side effect of having a budget and tracking your spending is that you can start saving. Many times we max out our credit cards because we have unexpected expenses. Building up your savings can help you create an emergency fund to use when that happens so you don’t have to resort to your credit card.
Unexpected events aside, budgeting and saving is also about your financial goals. When you make your budget, take the time to set some short-term and long-term goals for your spending. Maybe a long-term goal is to pay off one of your credit cards, while a short-term goal might be to upgrade your phone. Whatever your goals may be, it’s important to have them in writing and to update them often.
The bottom line
Sometimes life throws us curve balls. Whether you’ve maxed out your credit card to handle an emergency, or to take care of a big purchase you’ve been wanting to make, you can come back from it. Just go back to the basics of healthy spending: sticking to a repayment plan, having a budget, setting financial goals, and building up savings.