Your credit card company would probably love it if you maxed out your credit card. However, maxing out your credit card can hurt you in multiple ways. Some cards may offer bonuses, such as airline miles, to entice you to use them more frequently or even make large purchases beyond your means. While it's perfectly legal to max out your card, it's usually not in your interest to do so. Between the potential damage to your credit and the cost of paying debts back, staying away from maxing out your card is usually the best way to go.
Most credit cards come with a clearly defined credit limit. If your card has a $500 limit, it means that you can charge up to $500 worth of purchases on it. If you hit the limit, your credit card company can either refuse to accept additional charges or can let you make the charge, then hit you with an "over the limit" fee. If you get too close to your credit limit, you could end up going over it inadvertently and getting hit with the fee. Bear in mind that this can only happen if you give your credit card company the option of letting you go over your limit.
Utilization and Your Score
As you use credit, credit card companies report to the credit bureaus on how you're doing with their cards. One of the things they report is how much of your credit limit you've used. This number gets used to calculate your credit utilization. For instance, if you have a $500 limit and your highest balance is $75, you have 15 percent utilization (75/500), but if you have a $450 balance on a $500 limit, your utilization is 90 percent. Credit scores usually include utilization as a major factor, and the lower it is, the better your score will be. Generally, you want to keep your utilization well below 30 percent. This means that if you have a $500 limit, your balance should stay under $150.
The Cost of Interest
Credit cards that are not paid off in full every month generate more income for credit card issuers than cards that get paid off. When you borrow money on a credit card and do not pay off the balance in full every month, you have to pay it back with interest and typical credit card interest rates are very high. As of October 22, 2013, you can probably expect to pay at least 15 percent interest on a normal credit card. This means that if you owe $500 and your card has a minimum payment of $15 and a 15 percent interest rate, it will take you 43 payments to pay that balance off -- costing you a total of $1301.66. With higher balances or higher interest rates, making the minimum payment can cost you even more.
A Maxed Out Card
Think about why you carry a credit card. It probably isn't more convenient than a debit card, since debit cards can be used almost anywhere that you can use a credit card. For many people, a credit card is a tool they can use to manage their spending or to provide money for an emergency when their emergency fund isn't enough. If your credit card is maxed out, though, it's useless to you as a source of emergency money or as a money management tool since you don't have any credit left and any way of continuing to use it.
Even worse, you have to pay back the money you owe on it. This means that you're taking money that you earn tomorrow to pay off spending that you did yesterday. If you also want to be able to spend money tomorrow, you'll have to make more than you do now to make up for the payments on your debts.
- Discover: How Is My Credit Limit Determined?
- Chicago Tribune: Understanding Credit Utilization
- Bankrate: Credit Cards
- TheStreet: Why Minimum Payment on a Credit Card Costs You So Much
- TheStreet: 10 Reasons You Need a Credit Card
- CNN Money: Controlling Your Personal Debt
- Consumer Financial Protection Bureau. "CARD Act Report."
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.