If there is one thing that virtually all types of credit cards have in common, it is the fact that it comes with credit limit. Credit limit is the maximum allowable credit available in a card without penalties. While this credit may be used in its full amount, card companies do not intend to let cardholders use the whole limit. In fact, once you approach or go beyond your limit, you can expect bad effects on your credit score.
Ideally, cardholders must maintain a balance 10% below their credit limit, as this works great on your credit score and are accepted by most card companies. In this article, we will discuss some of dangers of maxing out your credit cards:
One: Know that roughly 30% of your credit score is based on the amount of available credit you are using. This is a ratio of card balance to credit limit is known as credit utilization. The closer the balance is to your limit, the lower your credit score will drop.
Two: Maxing out your credit cards could land you in heaps of trouble with lenders or banks. When you are in the process of applying for a loan or another card, the bank will determine how much credit you are using. If they see that you are using too much credit, then you will be deemed as “high risk”, making it hard for you to get an approval. If you had histories where you maxed out your cards, you are likely to be denied of any loan.
Three: Even if you try to keep your balance below the imposed limit, you could still end up exceeding it once you start incurring finance charges. Know that it is extremely hard to get it back down simply because you are likely to be charged with over the limit fees each month that you exceed your limit. This is the reason why you must leave a room big enough on your card to avoid any over-the-limit fees.
Four: The balanced on a maxed out cards are harder to pay. There have been many cases where cardholders are paying the same balance in years! If you calculate the interest charges that will accumulate in these balances, the numbers are astounding.
Five: As a rule of thumb, companies have the right to increase the interest rate once a cardholder defaults on their terms by exceeding their credit limit. Do know that the default rate is the highest interest that your card company can legally charge. Usually, the charge has a minimum of 30%. If you have high balance and you are charged with high interest rate, it could totally wipe out your savings.