When used responsibly, credit cards can help you manage your finances and fund unexpected expenses such as medical bills or repairs around the house. Some credit cards even offer rewards, cashback, or miles that can maximize the money you’re spending.
But if you keep using your card, you may easily end up with a maxed out credit card. The thing is, you may not always know that you’re close to reaching your credit card limit. Sometimes, you’ll only realize it when you get charged an overlimit fee or when your next credit card purchase gets declined.
This is just one painful consequence of maxing out your credit card. What you don’t want is to start accumulating credit card debt because of your maxed out credit card. Avoid such a credit card mistake before it’s too late.
What is the Meaning of a Maxed Out Credit Card?
Simply put, maxing out a credit card is using up its credit limit or reaching the maximum amount that you can spend on your card. For example, if your credit limit is PHP 50,000 and your outstanding balance is PHP 50,000, then you have maxed out your credit card.
Is It Bad to Max Out a Credit Card?
Ideally, you’ll want to keep your credit card balance below your credit limit. However, unexpected expenses happen, which may cause you to use your credit card and max it out. But yes, using up your credit limit is bad for your finances.
What Happens When You Max Out Your Credit Card?
Sometimes, it takes several credit card purchases; other times, all it takes is one major purchase to max out your credit card. Whether it’s a necessary expense or not, expect these things to happen when you reach your credit card limit.
1. Your Minimum Payments May Become Unmanageable
A maxed out credit card can strain your finances, especially if you’re making only minimum payments every month. Not only will it cost you significant interest, but paying off your balance will also take longer.
And because your outstanding balance increased, your minimum payments will also increase. Your payments may grow to the point that you can’t afford them anymore. Interest rates, outstanding balance, and other charges can pile up. Any amount not paid off by the end of your billing cycle will be charged with interest.
For example, your bank charges 2% interest for any balance not paid off by the end of the billing cycle. It means that every month, your balance will grow by that 2% every month until you pay it off.
2. Your Credit Score May be Affected
If you’ve gone over your credit limit, your credit score may decrease as your credit limit decreases as well. If you’re planning to take out a loan, your debt-to-income ratio[1] may take a hit.
3. Your Creditworthiness is at Stake
A maxed out credit card is also a sign that you may not have your finances in order, especially if you max out your card repeatedly. Moreover, your bank will not allow you to make additional charges to your card until you pay down your balance.
4. Your Credit Card Becomes Unusable
One of the reasons for getting a card is to have access to credit when needed. However, if you’ve already maxed it out, you’re eliminating this benefit. That means you can no longer use it for real emergencies, and you’ll be forced to take out a loan to cover this expense. As a result, you’ll be burdened with more debt and more payments.
Read more: My Credit Card Application Was Denied. What Should I Do?
Fees and Penalties in a Maxed Out Credit Card
Apart from the outstanding balance and interest rates, you need to pay for penalties associated with a maxed out credit card. Here are some of the credit card fees you may need to pay for, depending on your bank:
- Late payment fee – PHP 300 to PHP 850 or the unpaid minimum amount due, whichever is lower
- Over limit fee – PHP 300 to PHP 750 per occurrence (if your bank allows going over the credit limit)
- Multiple payment charge – PHP 40 to PHP 50 per payment, over the maximum transactions
Tips to Avoid Maxing Out Your Credit Card
If you’re careful about your credit card spending, you don’t need to worry about a maxed out credit card, But follow these helpful tips for good measure.
1. Know Your Credit Card Limit
If you don’t know your credit limit, then it will be harder to put a limit on your credit card spending, too. Call your bank’s customer service hotline to confirm your credit limit. You may also check your online banking account (make sure to enroll your credit card account) or your credit card statement.
Read more: 9 Useful Features Your Credit Card Should Have
2. Review Your Credit Card Statements Regularly
When you check your monthly statement regularly, you can see both your outstanding balance and available credit. When you know how much credit you have left to spend, you can better plan how to keep your spending below that amount.
This will also help you know if a credit card will soon max out so you can adjust your spending accordingly.
If you receive your credit card statements late, check your balance using your bank’s online banking service.
3. Pay Off Your Balance ASAP
Just purchased the latest gadget using your card? Pay off the amount as quickly as possible. It will give you more credit to spend on future purchases. Additionally, it will reduce your credit utilization ratio and improve your credit score.
4. Track Your Budget
List down your monthly expenses to see where your money is going. Create a monthly budget plan and stick with it. And should you use your credit card, make sure it’s to pay for the bills or to purchase essentials.
5. Avoid Making a Cash Advance
A cash advance usually has a higher interest rate compared to regular credit card purchases. If you do a lot of cash advance transactions, not only will you max out your card a lot faster, you’ll also pay more due to higher interest rates. You’ll need to pay cash advance fees on top of your outstanding balance, too.
6. Be Careful with Multiple Cards
It’s easier to overspend if you have more than one credit card. The amount of credit available to you is higher, giving you more opportunities to spend.
However, it doesn’t mean having multiple credit cards is bad. You just need to be extra careful with them. Pay off the balance in each card monthly. You may also want to create a separate spending tracker for each card to know your current balance.
Read more:
- Here’s Why You Should Have More Than One Credit Card
- Got Multiple Credit Cards? Here’s How to Manage Them Well
7. Avoid Emotional Purchases
If you’re feeling lonely or upset, keep your credit card away from you. Postpone your trip to the mall until you’re in a better mood.
Purchases made when you’re emotional may help you feel better for a while. But you can suffer from buyer’s remorse later on, especially if you purchased something you don’t really need or want.
8. Keep Your Balance Lower Than Your Actual Credit Card Limit
Having a big credit limit means you can purchase more. But that doesn’t equate to having a huge sum of money in the bank. It also doesn’t mean that you should go ahead and max it out.
To avoid going over your credit limit, set your own personal credit limit. Base it on your income and expenses—not the credit limit set by your credit card provider.
Ideally, keep your credit card balance low at 30%.[2] For example, if your credit card limit is PHP 50,000, limit your credit card spending to PHP 15,000.
This threshold applies to what you owe the bank not only on each of your credit cards but also the total balance across all your cards.
9. Check Your Available Credit
Knowing your available credit before a purchase is as important as knowing your credit limit. Doing so lets you know whether to go ahead with the purchase or postpone it until you’ve paid off your balance.
10. Remember That Your Credit Card isn’t Free Money
Research has shown that people are willing to spend more―as much as 83% in some cases―when paying with a credit card instead of cash.[3]
Having the right mindset curbs spending and prevents a maxed out credit card. Remember that whatever you purchase with your card, you need to pay it back on time.
Before you make a credit card purchase, always ask yourself: “Can I afford to pay it back in cash right now?”
If the answer is no, better not buy it. Treat each credit card purchase as though you’re actually using cash. It’s easier to control your spending that way. It also helps you focus on your financial goals and avoid expenses that won’t help you meet them.
Can You Exceed Your Credit Card Limit?
You can exceed your credit card limit. But you can’t really know how much you can spend since you’ve already gone beyond the maximum amount. Banks may consider your payment history for over-the-limit transaction approvals, though.
What Should You Do If You Maxed Out Your Credit Card?
Here are a few things you should do once you’ve gone over your credit card’s limit:
1. Stop Using the Maxed Out Credit Card
You can no longer use your card, anyway. Not until you get the balance down. But the key is to avoid getting yourself in more financial trouble.
If you feel like you can’t stop using your card, leave your card at home when you’re going out. Delete your credit card information from online shopping sites and apps, and use the card lock feature to prevent unnecessary purchases.
2. Restructure Your Budget
A maxed out credit card may be a sign that your budget needs an overhaul. Look at your credit card statements to determine why you had to max out your card. Is the debt within your control or due to unexpected circumstances?
Once you figure out the answer, you’ll know where to make changes. Consider adjusting your budget to avoid overspending. Track your monthly expenses and cut back on unnecessary spending.
3. Pay Off the Balance
If you can, pay the outstanding balance in full. Your bank may allow you to start using your card again if you pay off a significant part of your balance.
Moreover, check your balance regularly. Be more aware of your purchases and keep them below your available total credit limit.
4. Get a Credit Limit Increase
It’s a bit of a reach, but you may also request a higher credit limit. Some credit card issuers may let you submit a credit limit increase request online. However, requesting one does not guarantee you’ll get it. Your outstanding balance and existing credit limit will be considered, and a maxed out credit card may cause your request to be denied.
Read more: Credit Card Limit: What is It and How Do Banks Determine It?
Final Thoughts
We hope that you understand the meaning of maxed out credit cards through this article. Keep your credit card balance low so that you can afford the monthly payments.
Dealing with a maxed out credit card is a situation you don’t want to be in. Now that you know what happens if you max out a credit card, you can do something today to keep your spending from getting out of hand.
Sources:
- [1] What is a debt-to-income ratio? (Consumer Financial Protection Bureau, 2019)
- [2] How Much Credit Should I Use? (Akin, Experian, 2020)
- [3] Credit Card Spending Studies (2018 Report): Why You Spend More When You Pay With a Credit Card (ValuePenguin)
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