Most credit cards come with a certain limit, which dictates how much you can spend on them. It is usually recommended to keep your spending well below the limit because you may need the remaining amount for an emergency.
However, some people end up reaching the maximum limit, which we can also refer to as a “maxed-out credit card.” In the case your credit card is maxed out, you can find yourself in a financial pickle.
When do you know that a credit card has maxed out?
A maxed-out credit card is either close to the assigned limit or has already crossed it. For instance, if your card limit is $2000 and you have already spent $2000, then by definition, it is maxed out.
What happens if you don’t pay down the balance?
In cases where your card limit is already breached and you haven’t paid the balance down, you may have to pay a late fee. However, the consequences don’t end here. You may also be subject to a higher interest rate, which means your credit score may see some serious damage. Additionally, if your dues remain unpaid for a long time, your card can be frozen, and in the worst scenario, your debt may get sold to an agency that can further sue you.
You may also be subject to a credit limit fee if your balance isn’t paid down before the application of finance charges on your account. In some cases, the issuer may disallow you from making additional charges until the balance is paid down and the available credit is opened up again.
What can you do about a maxed out credit card?
While having a maxed-out card isn’t exactly pleasant, it also isn’t the end of the world. If you take immediate action and bring your balance down in time, your debt could very well be under control. As a result, your credit score will also be back on track.
The first and the most obvious thing to do should be to stop using the card and plan a way out of debt. However, leaving the card as it is will only have you struggling in the long run when you have no purchasing power and a terrible credit score. Here, you can exercise two options.
Get the limit increased
You can speak to your issuer directly and ask them to increase your card limit. This way, you will have more time and also some remaining limits. You can apply for a higher limit either online or by calling your card issuer.
Pay down the balance
Discuss all possible payment options with your card issuer and come up with a plan to pay the balance off. Unless it is paid fully or according to the terms decided by your issuer, your purchasing power will continue to go down.
Don’t use the card
Generally, once you have exceeded the limit and haven’t paid it down, you cannot use the card anyway. So the only way to go about it is to keep away from the card. Here are some “out of sight out of mind” strategies you can implement to stay away from getting tempted to use the card.
- Keep it in a drawer or on a shelf you can’t access easily.
- Use the lock feature of your card (if it’s there) to stop you from purchasing anything in the future.
- Don’t take the card with you when you plan to go out.
- Delete all the card details from websites and applications you use frequently.
Do whatever it takes to prevent or lower down your temptation to use it, and once you’ve finally stopped, you may not even feel like closing the account at all.
Plan and evaluate your budget
Getting your card to the point of maxing out could be nature’s way of telling you to slow down and evaluate your monthly budget. This is why your credit card statements are not meant to be thrown away but instead looked at to find out what caused your debt anyway.
Find out if you can still control your debt or if it’s a result of unforeseeable factors like emergencies you may have encountered. Once you find out the root cause, it’s easier to start making changes. However, regardless of the cause of your debt, you must take certain steps to avoid overspending.
- Keep an eye on your weekly and monthly expenses
- If needed, cut down on some purchases
- Unsubscribe to any services you no longer use
- Have less restaurant food
Don’t stick to minimum payments
Now that you have found some space to spend in your newly created budget, you can start by paying your dues. Even though paying the minimum amount will save you for a while, it’s always good to pay more and get rid of the debt quickly, especially if you can afford to.
However, if you have more than just a credit card debt, it’s time to develop an action plan. You can also use the snowball method, which requires you to first pay down smaller loans and then proceed to bigger ones. You can also go for the avalanche method, which is the exact opposite of the snowball method. No matter how close or far you are from your end goal, don’t hesitate to take the baby steps.
Look into balance transfer credit cards
These cards allow you to transfer some of your balance to a card with a lower rate of promotion and something that will allow you to take a breather before paying it off. However, there is a transfer fee that you’re required to pay if you wish to consider the option.
Apply for a personal loan
This can get tricky, especially if you don’t have a good credit score to apply for the loan in the first place. However, the idea is to use the loan to pay the amount you owe on a maxed-out card and then pay the personal loan off in installments. If you keep making payments on time, you should be able to pay it off in the decided term.
Come up with a plan to manage your debt
You can consider going for a debt management plan if you have a certain number of years remaining to pay your card off. Typically, a credit counseling agency should give you a plan to either have monthly payments with a lower interest rate or whatever else suits your situation.
The debt management option is usually helpful in case of more than a single debt. Even though there’s a fee you may have to pay, it’s worth saving up a good amount of money in the long run.
How can you avoid the situation?
While maxing your credit card out isn’t the end of the world, it’s better not to have to deal with a situation this complicated. Since it is avoidable, you can take steps to monitor your usage and keep it well under control. Make sure to keep track of your credit limit and balance at least on a monthly basis.
You can use online banking services or simply call your credit card customer service to find out where you’re at with the card limit. Moreover, always make an effort to keep all your purchases under the total limit. As soon as you suspect that the limit is approaching, stop using the card immediately and pay the existing balance down.
The impact on credit score
Maxed-out cards can have a huge impact on your credit score, especially if you still haven’t made an active effort to pay it down. If your credit card lender or issuer gets in touch with the credit bureaus and reports your account, you may end up in a pickle.
This is because a significant part of your credit score depends on how much or how little you’re using the available limit. Generally speaking, if your balance is more than 30 percent of the existing limit, it will hurt your credit score.
It’s better if the ratio of your credit limit and balance is lower, as it will keep your credit score safe from any impact. Similarly, if you’re able to pay off the balance before statement closure, your card issuer will not report to the credit bureaus about your maxed-out card situation.
The bottom line
In the end, there are a number of ways to go about a maxed-out card situation, but it’s always good to practice prevention instead of looking for a cure. While maxing out doesn’t imply that you’re a bad borrower, it does put you in a tricky situation that may end up harming your credit score. A bad credit score can further lead to more consequences such as being unable to qualify for loans, getting a mortgage, or buying a car or house, etc.