Credit cards, one of the most comforting creations of mankind. They give you the luxury of spending money which you don’t own, what else could you ask for? However, this liberty comes with costs/ramifications (besides interest) which are often overlooked amid delusions of grandeur.
Velvety roads often lead to dark territories
One such ramification comes to the surface when max credit card limit is realized. You would think that a maxed out credit card isn’t something to be embarrassed about. Your credit card provider has given you a credit limit and that could come handy in the hour of need.
Read more: How to Build Credit Without a Credit Card
This is what happens when you reach max credit card limit
That’s precisely the point, maxed out credit card is often considered as an indication that you are in deep financial trouble. As a matter of fact, lenders consider that you are most likely to default, as a result of which they impose high-interest rates on you.
This is where the bumpy ride starts. Realizing max credit card limit can dismantle your credit score, lead you to problems that can push you deeper into debt. Thus making it harder to borrow money in the future and causing other unforeseen repercussions.
Here is what happens when you max out your credit card:-
1. Wrecked Credit Score
You see that credit score is determined by various factors but the most prominent of them all is the credit utilization rate.
Credit utilization rate is the amount of credit balance you have against the credit limit. The higher the credit utilization, the lower the credit score will get.
If you maxed out a credit card, it will show up on your credit score and maxing out a couple or more credit card will have a more detrimental effect.
Experts suggest that an optimum credit utilization rate hovers somewhere around 30%. You should maintain this utilization rate on all your lines of credit.
When you have reached the max credit card limit, it is not only an alarming sign for your credit card provider but also for the lenders whom you may approach later.
It is so because lenders while processing your loan application (particularly the mortgage and car loan) look into your credit utilization rate.
The more your credit utilization rate is, the less credit you have at your disposal. This often translates to the rejection of loan applications.
If things come down to this, you should also consider freezing your credit so that you are not tricked into opening yet another line of credit.
Impulsive decisions like adding another line of credit via credit cards to fund your car expenses will only immerse you further in debt.
3. You may be shoved into the forbidden territory
Even if you are tethering around the credit limit, you may easily foray into the dangerous territory once the finance charges are applied to your credit card balance.
Once you surpass the credit limit, penalties would be cast on you which will further worsen the complexion of your finances. It could be difficult to get back on track if you adhere to making monthly minimum payments.
4. The balance would reach an unconquerable summit
It could take forever to repay the balance of a maxed out credit card. The interest rate could sky-up if you do not pay the balance within 60 days of taking credit.
Consequently, the balance would keep in rising because of the piling of compound interest. Things would further slip out of your hands if this is the case.
5. You would activate the penalty rate
Credit card issuers reserve the right to increase your interest rate in case of non-performance of credit card terms (read the fine print). You would defy the contract by exceeding the credit limit and trigger the penalty rate.
A penalty rate is the highest possible interest on your credit card and is often deemed to be 30% (going by the contemporary industry practice).
A high-interest rate racks up your balance. Even if you are making monthly payments, they won’t suffice as your monthly commitments will only hold the interest down.
What to do when you have maxed out your credit card
1. Stop Using All Credit Cards
You might be having a low balance on other credit cards, don’t pay these balances out of haste. You should be focusing on paying the whopping balance of the maxed out credit card.
If you are having a credit card to survive month to month, then you might want a piece of professional advice from TheCreditPeople.
It works with you closely and builds a strategic credit score improvement plan; broken down into simple steps. TheCreditPeople also empowers you to pay off your debt besides providing you a detailed analytical report of your expenses.
This helps you in planning out your monthly budget and carving out a roadmap for your long-term financial goals.
2. Setup your foundation
You can never build a stronghold without setting your foundation right, or can you? Much like the real world, shaky foundations in personal finance make the structures crumble or even leave them to ruins.
A solid personal finance foundation comprises of a budget (you can build one with the help of a budgeting app), tracking your expenses and automating your bill payments.
This isn’t a daunting job, there many personal finance apps like Trim, Charlie etc which will see you through. You just have to fill in some details and then these apps will provide statistical reports of your expenses alongside highlighting the key areas where your immediate attention is needed.
3. Decide Your Game Plan
If maxing out a credit card hasn’t dismantled your credit card, a balance transfer credit card can save the day. You will likely get a zero% APR for no less than 10 months.
This gives you a chance to pay off a major chunk of your debt whilst the interest isn’t racking up your balances. Figure out what monthly payment will suffice to pay off your balance before the new APR sets in. That’s the name of the game.
If your credit score isn’t enough to fetch you a balance transfer credit and you want to improve your credit score desperately, look no further than creditrepair.
Creditrepair.com peruses your credit report very closely and reaches out to credit unions if some unscrupulous transaction has reflected badly on your credit score.
Moreover, it crafts a highly strategic and customized game plan for you to maintain a healthy credit score. Intrigued? Go find your prospects at creditrepair.
If your credit score isn’t good enough for a balance transfer card and you don’t find it feasible to take professional services because you are racing against the clock. Take a debt consolidation loan from debt consolidation care.
Debt consolidation will assess your overall financial picture and then consolidate all your debt into just one monthly financial obligation. The APR is much lower than that of your credit card (mostly at least).
If you wish to pay your debt on your own, then you have two popular strategies to choose from. One is Debt Avalanche and Debt Snowball.
Debt Avalanche strategy is about targeting the card with the highest APR and paying off its balance at the earliest. This way you tackle the card which is adding compound interest to your balance.
If you get more kick from paying off a card quickly, then Debt Snowball strategy is the best fit for you. This strategy is about paying off credit cards with the smallest balance first and then tackling other higher balances.
You can make the hybrid strategy as well; pay off the smallest balance first and then start to tackle credit cards with the highest APR first. This hybrid strategy is called Debt Blizzard.
It’s advisable to keep your credit card balance low so that you can afford to break it down into monthly payments, bearing in mind that any balance higher than 30% can wreck credit score. You should avoid having a maxed out credit card in any case.