Credit limit is the maximum amount you can charge on your credit card without penalties. However, your credit card company doesn’t intend for you to maximize this limit. As a matter of fact, it is not advisable to go near your limit. Here are some of the things that could happen if you max out your credit limit.
1. You can expect a credit score drop
Your credit score is calculated based on many factors, one of them is the available credit that you are using. The ratio of your credit card balance to your credit limits, which is also known as credit utilization, makes up 30% of your credit score. Maxing out your credit cards will bring your credit balances closer to your credit limit, which will significantly hurt your score.
2. There’s the risk of going over your credit limit
If you’re too close to your credit limits, you could end up going over them after finance charges are added to your balance. If you went over your credit limit, bringing it back down can be a challenge because you will be charged an over-limit fee every month for as long as the balance is over the limit.
3. You’ll reduce your chances of getting approved for credit
Whenever you’re trying to apply for a loan or credit card, the bank will check on how much available credit you have. If you’ve maxed out your credit cards, lenders will think that you have more debt than you can handle. This will make you a high-risk borrower and your loan or credit card application can be denied.
4. The default rate can be triggered
Maxing out your credit card is one of the ways in which you can default on your credit card terms, and your credit card company will have the right to increase your interest rate. Typically a minimum of 30%, the default rate is the highest interest rate your credit card company can charge. If you’re already struggling to pay for your credit card debt, the increase interest rate of a high credit card balance can ruin your debt repayment plan.
5. It would be harder to repay the balance
A maxed out credit card balance can take months or even years to repay, depending on your credit limit. This is especially true if you are paying for only the minimum. Even if you try to pay the balance in full, it can be difficult to release a considerable amount of money whenever the bills are due.
What is a reasonable credit card balance?
It is advisable that you keep your credit card balance below 10% of your credit limit, which is not only good for your credit score but it’s also what lenders would like to see. Furthermore, keeping your balance within that range makes it more manageable for you. In order to avoid maxing out your cards by mistake, review your credit limit before making a purchase.