As you probably know, credit cards are a form of payment that allows you to spend money you don’t have. The available balance is a credit, which you are responsible for paying back to the creditor. However, there is a possibility that credit card customers may use their cards too often or not pay their bills when it’s due. So creditors have built-in limits established to protect the company. Many creditors start new customers with lower limits that can increase over time as their credit score improves and they establish a history of on-time repayment.
Large or small, however, it is never a good idea to end up with maxed-out cards. In fact, it’s not an idea that should even cross your mind. Reaching that point has consequences, exposing you to financial risks that could ruin your future. Sure, credit cards are convenient; but there are repercussions for the foolhardy and fiscally irresponsible. To help you make better decisions for your financial future, let’s talk about some of the consequences of maxing out a credit card.
Your Credit Score Drops
Maxing out your credit card affects your utilization ratio. In simple terms, the utilization ratio is a comparison of two numbers. The first of these numbers is the amount of available credit you have left, while the second is the total amount of credit that you have used. The utilization ratio makes up a significant part of your credit score. So if you’re someone who may not ever have made a single late payment, but find your credit score plateaued or even dropped, consider this:
When you utilize more of your credit, you are becoming a larger financial risk. It communicates that you’re using it frequently because you need money. It also indicates that maybe you’re in over your head and don’t know how to manage the card, making you less likely to be able to pay your bill when the time comes. Even experts recommend that you should only use up to 30% of your card limit. The healthy range is 5-10%.
Each debt you accrue takes up any free space in your income. This pushes up your utilization ratio, meaning you commit more money to pay the credit card if you have anything left over. If not, you’re getting into debt plus garnering higher interest rates leading to even higher repayments. If your debt-to-income ratio is 50%, you’re using half of your earnings to pay for the debt, including the credit card. Then once you max out your credit card, you limit any opportunities for that card to cover you in an emergency.
That said, you can recover if you stay on track with payments and whittle down the balance. However, you may need more money than before to do it.
Your Loan Options Become Limited
If you have high credit card balances, other lenders will not be so open to dealing with you. A maxed-out card indicates that you are a risky borrower and you might get into a similar situation with them. You’ll find no success getting a mortgage or a car loan. Every time you apply, they will check your available credit, and the high utilization is a red flag.
Lenders look at both credit utilization and debt-to-income ratio. They want to see if you are worth the risk and if you have enough money to pay the loan.
You Struggle to Pay Down Your Balance
Once you get a high enough debt on your credit card, it can become too much for your income to pay off quickly. The loan will likely take a backseat if you have other urgent things you need to pay. The credit card company will offer a minimum payment you’ll need to fulfill to pay off the loan. However, going for the minimum will only affect the principal a little. Plus the interest can compound before a dent has even been made in the principal. It could take years to repay things by only paying the monthly minimum. Ultimately you find yourself turning the credit card into a liability rather than a convenience.
Another consideration you have to make is that the credit card company may adjust the minimum payment once they see your balance. It isn’t uncommon to have higher monthly payments to ensure that you’re settling the borrowed money.
Your Card Is Declined
Once you’ve maxed out your card balance, there is no space left to make transactions. Even if you’re paying the amount each month, the credit card company may opt to lock you out of using the card in the meantime. They want to ensure you’ve paid a percentage of the debt before giving you access once more. If you try to use the card, you’ll get denied transactions.
In another scenario, the purchase may push above your credit limit given enough space. However, the credit card company may have guidelines that dictate extra fees if you move past it. You are ultimately increasing your debt, and you’ll have to pay more before long.
Your Interest Rates Increase + Penalties
Most credit card companies have insurance written into the fine print to ensure they maximize the most out of a borrower if they prove too risky. Many encounter sudden jumps in their interest rates, increasing the minimum balance they need to pay every month. Since you signed the contract, you cannot fight against these terms, even if you weren’t aware they were there in the first place or didn’t know what was meant by them.
Creditors can also impose a penalty fee for maxing out your card, which can vary depending on the company. Some give as high as 30% charges for maxing out the card, increasing the balance you need to pay off.
Is It Too Late If I Already Maxed Out My Card?
Maxing out your card is indeed a dangerous situation, but that doesn’t mean there are no solutions. One of the best ways to approach it is to look for a credit counseling agency. These are the sort of companies that aim to help borrowers get out of debt through plans and other strategies. A nonprofit organization like Money Fit can be the best option for you to take. Here are some of the ways they can help you:
Debt Management Plans
Consolidating credit cards into one payment through a debt management plan can help in a multitude of ways. These plans are facilitated by nonprofit credit counseling organizations, such as Money Fit. These organizations negotiate with credit card lenders and try to get an agreement that they’ll facilitate. They could consolidate all your debt into one payment and lower the interest rate. The lender may not get all the money they’ve lost, but a debt management plan assures them of payment within a fixed period. Debt management plans usually last anywhere from three to five years to complete.
Balance Transfers
A balance transfer card acts similarly to debt management in which you consolidate loans into a single entity. However, it is usually with another credit card company. It requires a high credit score, and there is no assurance that they’ll agree even with the counseling company’s help.
Hardship Programs
The hardship program aims to help people who have experienced unexpected life-changing scenarios or extenuating circ*mstances. If you are unemployed or fall into hardships, the credit card company may stop interest payments or fees. However, there are drawbacks. You could lose your account, and your credit score will still take a hit.
There is No Permanent Damage
While a maxed credit card does have consequences, it isn’t impossible to fix. The damage you receive to your score and income may take time to heal, but as long as you stay diligent, you’ll see positive changes eventually. Remember to seek help from a credit counseling company like Money Fit if you’re in a dire situation. Credit card companies are more open to talking to these organizations because they provide assurance.
