If you’re bumping up against your credit limit, you have what’s called a maxed-out credit card. When this happens, it can have an impact on your overall credit health. I don’t want you to panic, but you need to be aware of the impact of a maxed-out credit card so you know what to expect.
A maxed-out credit card is when you’ve reached – or even tried to exceed – your credit limit. An example explains this pretty quickly.
Let’s say you have a $3,000 credit limit on your credit card, and your balance is $3,000. That’s maxing out your credit card. If you aren’t careful and miss a payment, your finance charges could push your balance beyond $3,000, which also creates new headaches, like fees. So, at the very least, make your minimum payment and make it on time.
Listen, gazing at the balance of your maxed-out credit card for the first time can be a terrible shock. I know because I’ve experienced that moment. But I survived it and eventually got out of debt and you will, too. The most important thing right now is to know what to expect when this happens to you.
Your Credit Score May Drop
You have a credit utilization ratio, which is the amount of credit you’ve used compared with the amount of credit you have available. When you max out a card, your ratio is 100%. A ratio higher than 30% can decrease your score.
For example, if you have a credit limit of $2,000, your balance should not exceed $600, which is 30% of your limit. Your available credit is 30% of your FICO score. So, as your balance goes above that 30% threshold, your score is damaged. The larger the balance, the worse the impact on your score.
If you’ve been thinking of applying for credit, this is not the time. Wait until you’ve paid down your debt and your score has improved.
Your Purchase Is Declined
It’s unpleasant to have your credit card denied when you’re alone, not to mention if there’s a line of shoppers behind you. But if your purchase takes you over the card limit, that could happen.
Note: You can opt to go over the limit with some credit cards, but don’t do that, because it will get you further into debt. Plus, you’ll be charged an over-limit fee. When you’ve maxed out a card, the last thing you need is a bigger balance to pay off. For your own good, put away your credit cards for now and begin thinking about a debt-reduction strategy.
Your APR Could Increase
When your score drops and your utilization is high, credit card issuers worry that you’re in financial trouble. This could lead to an increase in the annual percentage rate (unless you’ve had the card for less than a year).
Credit card issuers regularly check on your credit score to assess your risk level. A dropping score is a red flag that you might be experiencing financial distress.
Your Minimum Payment Gets Higher
Your minimum is usually based on a percentage of your balance. A high balance means your minimum payment will increase.
If you are having trouble making the minimum payment on your credit card bill, call your issuer and explain your circumstances. Ask if you can enter a hardship program temporarily. The time to ask for help is before you miss a payment, which makes your score get even worse.
You Pay Interest on a Growing Balance
When you carry a balance, you’re paying compound interest. This means your balance will get bigger over time unless you take steps to pay it off.
Interest rates are high right now, so it’s important to get rid of your credit card debt. Fortunately, there many debt-reduction strategies to help you do that.
Ways to Pay Off Credit Card Debt
Let’s take a look at five options for paying off debt. Keep in mind that your best option often depends on your credit score.
- Balance transfer card. If you still have an excellent credit score, a balance transfer credit card is a good option. You’ll get a 0% APR for a period of time, usually about 12 to 21 months. This gives you a chance to pay off – or at least pay down – the balance during an interest-free period.
- Debt consolidation loan. If your score isn’t high enough for a balance transfer credit card, then consider getting a debt consolidation loan. With this type of loan, you can combine some of your debts on one loan and make one monthly payment. You won’t get a 0% interest rate, but it will likely be lower than the APRs on your credit cards.
- Debt avalanche method. List your credit cards from the highest APR down to the lowest. The card at the top of the list is your target credit card, so pay that one off first and then go down the list. This way, you tackle the card that’s charging you the most interest.
- Debt snowball method. Rank your credit card balances from the smallest debt to the largest amount. You target the smallest one first and get a sense of accomplishment more quickly. Note that you’ll pay more interest this way.
- Debt blizzard method. When I got out of credit card debt, I combined the avalanche and snowball methods to create my own strategy: the debt blizzard. I paid off my smallest balance first (snowball) and then switched to paying off the card with the highest APR (avalanche). Best of both worlds.