Posted on March - 24 - 2011
3 Reasons Why You Shouldn’t Max Out Your Credit Card
Every credit card comes with a credit limit. As long as you don’t go over your limit, there won’t be any penalties not from your credit card issuer anyway. Many credit card consumers don’t realize how bad it is to max out their credit card(s). If you have multiple cards, try to keep the balances evenly distributed amongst them, so you never run into this situation. Here are 3 reasons why you should never max out your credit card.
Hurts Your Credit Score One-third of your credit score depends on the “credit utilization ratio”, which is the amount you owe versus the credit line available to you. For example, if your credit card balance is $300 and your credit limit is $1,000, then your credit utilization is 30%. The lower this percentage is, the better your credit score will be. Experts recommend keeping your credit card balances below 50% of the available line of credit given to you. If you do this, your utilization ratio will be lower, which will keep your credit score higher.
Minimum Payment Goes Up Credit card issuers determine the minimum monthly payment for your credit card based on your balance. All issuers are different, but typically your minimum monthly payment is between 2 to 4 percent of your balance. Maxing out your credit card will increase the amount you owe each month, which will make it harder for you to repay it. On top of that, the longer you take to pay off the balance, the more interest you will accumulate. So you’ll end up spending more in the long run.
Lenders Don’t Like It Maxed out credit cards can lead to the denial of new lines of credit or loans. When you apply for new credit cards and loans, lenders like to know how much of your available credit is being used. If you max out your credit cards and have no available credit, its obvious that you are swimming in a pile of debt. This turns many lenders away because if you’re unable to pay off debts you already have, starting a new line of credit will only make the situation worse. By avoiding maxed out credit cards, you will have a better chance for new lines of credit.
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- Credit 101: Anatomy of a Credit Score
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