Maxing out a credit card refers to charging a credit card up to the maximum credit limit. So, if you have a credit limit of $500, and you charged $500 on that credit card, you have maxed it out. This behavior can cost you a lot of money. First, you may incur late fees or over-the-limit fees. Second, if you do not pay off the maxed-out credit card, you pay back a great deal more than you originally borrowed. Third, you may hurt your credit score, so any future money you borrow could be at a higher interest rate.
What Does It Mean to Max Out Your Card?
When you apply for a line of credit, you are granted an upper limit on the amount of money you are allowed to borrow. This upper limit or maximum credit line is based on a number of factors, including your credit score and the amount of income you make. While you can request that a creditor raise your line of credit or make your credit limit higher, this may not always be an option, and making this request may have an adverse impact on your credit score. When you are given a maximum limit or an upper limit, you can't charge above that amount without incurring fees or penalties. However, you can charge up to the total amount that you have available to you. If you choose to charge up to the total amount of your credit line, this is referred to as "maxing out" the card because you have used every dollar of your credit line that you can.
Maxing Out Your Card & Fees
Maxing out your card does not generally carry any fees with it, unless you accidentally go over your credit limit. However, since you are at the maximum limit of your credit line, any additional charges that you incur may put you over your limit. Many credit card companies add late fees, annual limit fees, or other fees to the amount you owe. So, if you have a $500 line of credit and you charge $500, you are at your maximum limit. If you are then charged a late fee and the credit card company adds that late fee to your balance, that can put you over your limit. For example, if the late fee was $25, you would now owe $525 on a card with a $500 limit. Being over the limit, even if it occurs as a result of a late fee, can cause you to be charged an additional over the limit fee.
Maxing Out Your Card & Interest Payments
The minimum balance on your credit card is calculated as a percentage of the amount you owe. Although a higher balance or a maxed-out card will result in higher monthly payments than a lower balance, the minimum monthly payment still might not be very high. A low minimum monthly payment on a high balance may mean that if you are only paying the minimums your payments are not even covering the interest you are accruing on your debt. If this is the case, the interest you accrue becomes a part of your balance that you owe and you are ultimately charged interest on the interest. Paying only the minimum payment on a maxed-out credit card thus may end up costing you many times more money than the amount you originally borrowed, as you pay interest over the years.
Maxing Out Your Credit Cards & Your Credit Score
Thirty percent of your FICO score (the credit score used to determine your credit worthiness and interest rates) is determined by the amount of money you owe. When you max out credit cards it has an adverse impact on your debt-to-credit ratio. Your debt-to-credit ratio refers to the amount of your available credit you have used. A lower debt-to-credit ratio is better. So, in other words if you have two credit cards with a $100 limit on each and you borrow $50 on each card, you will have a better debt-to-credit ratio than a person who maxes out one $100 credit card by charging up to the $100 limit.
Alternatives to Maxing Out Your Credit Card
If possible, it is best to avoid maxing our your credit card. Although opening new credit can hurt your credit score as well, by lowering the average age of your credit history (15 percent of your score) and by adding to the number of your inquires (10 percent of your score), this option may reduce your credit score less than maxing out one credit card. If you have multiple credit cards open already, it is always best to distribute the amount of money you borrow evenly over these multiple credit cards, instead of maxing out one single card.
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