What Happens if You Max Out Your Credit Card
No one takes out a credit card with the intent of maxing it out. We all have the best of intentions when that card first comes in the mail. But one bill not paid in full at the end of the month can turn into another, and another, and another. The next thing you know, you’ve hit your limit.
To anyone who has never been in credit card debt, it may sound crazy that the balance can get so high so fast. But anyone who has been there knows how fast it can creep up. And since it can happen so fast, it’s imperative to understand how to prevent it - and the full scope of consequences that can follow if you don’t.
Ready to jump in? Let’s get to it.
What Happens if You Max Out Your Credit Card
The answer seems simple, right? Maxing out your credit card just means you hit the credit limit and can’t use the card until you pay the balance down.
If only it were that simple.
Maxing out your credit card has far more implications than it may seem at first. Here’s just a few of the things that can happen when you hit your credit limit:
- Your credit score will take a hit
- Your credit card becomes unusable until you pay the balance down
- Your minimum payments might become unmanageable
- The increased balance combined with the credit card interest may make paying your credit card off (or even down) much harder to do
Allowing the balance on your credit card to increase to the point at which it’s maxing out is similar to a snowball turning into an avalanche. At first the snowball seems small enough to catch. But as it picks up speed, it grows in size, gains momentum, and becomes harder and harder to keep up with. The speed, size, and momentum turn that tiny snowball into an unwieldy and dangerous avalanche.
Here are more details about what can happen next:
Your Credit Score Will Take a Hit
If you max out your credit card, your score doesn’t take a hit overnight unless you max out the card overnight. Rather, your score will decrease as your balance increases.
Why does this happen? It’s because something called your credit utilization makes up a huge chunk of your credit score. (Credit utilization is the amount of debt you owe in comparison to the amount of credit that’s available to you.) Once that number goes over 30%, your credit score will start to go down.
Your Credit Card Becomes Unusable
This probably goes without saying, but it’s easy to forget in times of need. If you max out your credit card, you can’t use it anymore unless you pay down your balance. But if you aren’t able to make a purchase without the credit card, then presumably you won’t have the money to pay down the balance either.
See how dangerous this can get?
Credit cards are a tool that can be useful in emergencies. Don’t lose the tool because your balance creeped up to the max. And don’t forget that your balance picks up momentum as it grows, because that larger balance gets multiplied by the interest rate.
If you have $10,000 in credit card debt, it’s not because you bought $10,000 worth of goods. It’s because you bought an amount over time that multiplied to $10,000 with the aid of high interest rates.
Your Minimum Payments Become Unmanageable
As your balance increases, so too do your minimum payments. It’s not unheard of for those payments to grow to a point at which you can’t afford to pay them anymore. This is just another reason to keep the reins in on that balance.
It Gets Harder than Ever to Pay off Your Card
Back to those brutal interest rates. Any amount of money that’s not paid off at the end of a billing cycle gets charged interest, often to the tune of 20% interest and up. That means your balance will grow by that 20% every month until it gets paid off.
That increases your interest charges, increases your overall debt, and makes your debt payoff even harder. In the end, you’ll pay for a lot more than what you bought, so stopping that momentum before it builds too fast is crucial.
How to Make Sure You Don’t Max Out Your Credit Card
It’s really easy to say that you shouldn’t max out your credit card, but it’s a lot harder to instill practices that help you, especially if you’re on a tight budget. Here are a few things you can do to prevent things from ever getting to that maxed out level.
Build Up an Emergency Fund
While credit cards can be useful in an emergency, an emergency fund is even better. An emergency fund is a certain amount of money saved up and put aside in a separate savings account. It’s not to be touched for accidental budget overages, but instead for true emergencies (such as a car break down).
If you can create a solid emergency fund over time, you’ll have a system that prevents you from having to rely on your credit card in those emergencies. That will give you peace of mind and help you pay for emergencies interest-free.
Create a Habit of Paying Off Your Card As Soon As You Use It
One great way to ensure that you don’t max out your credit card is to pay the balance the same day you make a purchase. With mobile banking, you can even do it as soon as the purchase is made, no matter where you are.
This is a great habit because there’s no way to accidentally build the balance up faster than you can pay it - and you can’t forget to make the payment in time for the billing cycle to end. You’ll know for sure your balance isn’t building up while also practicing sticking to your budget (since you won’t be able to spend more than you can pay at that moment).
Only Use Your Credit Card for Emergencies
If the above habit isn’t realistic, or if you tried and it didn’t work, consider only using your credit card for emergencies. That way you won’t accidentally nickel and dime yourself at a high interest rate.
Keep that credit card for emergencies and, when you use it, create a plan to make sure you pay off the balance before it gets too high.
What To Do if Your Card is Already Maxed
If you’re reading this and your card is already maxed out, don’t lose hope. There are still steps you can take to reign it in and pay it off.
Get a Balance Transfer Credit Card
The most effective way to pay off debt is to decrease the interest you’re paying on it as much as possible. Balance transfers are a great way to do that.
A balance transfer credit card is a credit card that comes with a promotional interest rate (usually 0% for somewhere between 6 and 12 months) and is obtained purely for the purpose of paying off your other card. Some charge a balance transfer fee (often around 3%) but after that there should be no more fees until the promotional interest rate expires. All you have to do is pay the balance off before the promotional period ends or obtain another balance transfer at that time.
The best way to use a balance transfer card is to find one that offers the longest 0% APR intro period with no balance transfer fee. Then make sure you don’t make any purchases on that card, as that can skew the interest rates quite a bit from then on (since the purchase APR is usually higher).
It’s also important to understand that, when the promotional period is up, you could get charged retroactively on your balance at the new, higher interest rate. Either get a new balance transfer card before that happens or create a plan to help you pay it off first. How to create a plan? Just divide the balance by the amount of months you have before the rate goes up. That answer is how much you should pay each month to have the card paid off before then. Again, if this isn’t reachable, get as close as you can and do another balance transfer when the time comes.
Consider an Unsecured Loan to Pay Off the Card
Another way to decrease your interest rate is to seek a loan, which more than likely will come at a much lower rate than your current credit card. While you could do a secured loan such as a home equity loan, that would put your home up as collateral for your credit card. This is a risky move to make and one that should be avoided.
Instead, seek out an unsecured loan, such as those that can be found through peer-to-peer lenders. You should be offered a single-digit interest rate and a fixed payoff period if you're approved for a loan. That will put you on a payoff plan that will work much faster than minimum payments on your credit card. You’ll also get the peace of mind of knowing when the debt will be paid off, as long as you don’t miss a monthly payment.
Always Remain Vigilant of Your Credit Card Balance
As we’ve already seen, it’s ridiculously easy to max out a credit card. That’s why it’s so important to be vigilant of your balance. Don’t assume you know how much you’re spending without looking at the balance to be sure. You can check your balance online as often as you want, so utilize that.
Keep an eye on your transactions to make sure they’re not fraudulent or have any errors - and to see if there are any spending patterns that could be improved. Also keep an eye on it so you can halt spending for the month if it looks like the balance is growing beyond your control.
We all want to ignore our balances and statements when we fear them, but this will only make the problem worse. Stay on top of it to be sure that your statements are never painful to look at.