Question:
My credit cardi is maxed out and I'm struggling to pay it down. How will this affect my credit in the long run?
Answer:
That's a great question and it's something that many people struggle with so you're not the only one going through this. Credit cards come with a credit limit - the maximum amount you can charge without penalty. But, credit card issuers don't intend for you to use your whole credit limit. In fact, bad things can happen when your credit card balance approaches or even exceeds your credit limit.
Your Credit Score Drops
A large part of your credit score - 30% to be exact - is based on how much of your available credit you're using. This ratio of credit card balances to credit limits is known as your credit utilization. The higher your credit utilization, or the close your credit card balances are to your credit limit, the more your credit score is hurt. Maxing out one credit card is pretty bad for your credit score. But maxing out all your credit cards is much worse.
Lenders Don't Like It.
When you make an application for a credit card or loan, the bank wants to see how much of your available credit you're using. If your credit card balances are too high, banks take that as you have more debt than you can handle. Maxed out credit card balances could get your credit card and loan applications denied.
You Risk Exceeding Your Credit Limit.
The danger of keeping your balances high, but just below your credit limit is that in the event that your balance goes above and beyond the credit limit, your lenders will apply finance charges on top of your balance. And after your balance goes over the limit, it can be hard to get it back down because you're charged an over limit fee every month your card is over its limit. So do your best to stay as far away from your credit limit to avoid the over the limit fee from your lender.
Your Balance Is Harder To Repay.
Depending on what your credit limit is, if your balance is maxed out, it could take years to pay it off, especially if you're only paying the minium monthly balance. The problem is that even if you plan to pay off your balance in full each month, it it's high, you could have a difficult time parting with that much money at one time.
You Might Trigger The Default Rate From Your Lender.
You might not know this but credit card companies have the right to raise your credit card interest rate if you default on your credit card terms by maxing out your credit card. The default rate is the highest interest your credit card company can charge and is typically a minimum of 30%. And a high interest rate applied to a high balance is disastrous for your credit card repayment plan.
The Last Word.
Do your best to keep your credit card balance below 30% of your credit limit. That's typically a manageable credit card balance that's good for your credit score and acceptable to lenders. In order to avoid maxing out your credit card by accident, examine your borrowing limit before you make a credit card purchase.
My credit cardi is maxed out and I'm struggling to pay it down. How will this affect my credit in the long run?
Answer:
That's a great question and it's something that many people struggle with so you're not the only one going through this. Credit cards come with a credit limit - the maximum amount you can charge without penalty. But, credit card issuers don't intend for you to use your whole credit limit. In fact, bad things can happen when your credit card balance approaches or even exceeds your credit limit.
Your Credit Score Drops
A large part of your credit score - 30% to be exact - is based on how much of your available credit you're using. This ratio of credit card balances to credit limits is known as your credit utilization. The higher your credit utilization, or the close your credit card balances are to your credit limit, the more your credit score is hurt. Maxing out one credit card is pretty bad for your credit score. But maxing out all your credit cards is much worse.
Lenders Don't Like It.
When you make an application for a credit card or loan, the bank wants to see how much of your available credit you're using. If your credit card balances are too high, banks take that as you have more debt than you can handle. Maxed out credit card balances could get your credit card and loan applications denied.
You Risk Exceeding Your Credit Limit.
The danger of keeping your balances high, but just below your credit limit is that in the event that your balance goes above and beyond the credit limit, your lenders will apply finance charges on top of your balance. And after your balance goes over the limit, it can be hard to get it back down because you're charged an over limit fee every month your card is over its limit. So do your best to stay as far away from your credit limit to avoid the over the limit fee from your lender.
Your Balance Is Harder To Repay.
Depending on what your credit limit is, if your balance is maxed out, it could take years to pay it off, especially if you're only paying the minium monthly balance. The problem is that even if you plan to pay off your balance in full each month, it it's high, you could have a difficult time parting with that much money at one time.
You Might Trigger The Default Rate From Your Lender.
You might not know this but credit card companies have the right to raise your credit card interest rate if you default on your credit card terms by maxing out your credit card. The default rate is the highest interest your credit card company can charge and is typically a minimum of 30%. And a high interest rate applied to a high balance is disastrous for your credit card repayment plan.
The Last Word.
Do your best to keep your credit card balance below 30% of your credit limit. That's typically a manageable credit card balance that's good for your credit score and acceptable to lenders. In order to avoid maxing out your credit card by accident, examine your borrowing limit before you make a credit card purchase.
About the Author:
Most people understand that maxing out credit cards is bad, but they don't understand the consequences that happen behind the scenes and how it can affect you in the long run. If you need to repair your credit, start working on the simplest things first like paying more than the monthy minium payment. If you're still struggling to fix your credit, try talking to your lenders. You'd be surprised how many of them are willing to work with you.
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