You Maxed Out Your Credit Card — Now What?
A maxed-out credit card is a signal to check in with your current budget, expenses, credit cards and financial accounts to ensure that the financial tools you lean on to manage your money are still a good match for your financial reality.
Here’s a look at what a maxed-out credit card means, and what it might indicate about your financial life.
What Is a Maxed-Out Credit Card?
A maxed-out credit card is a credit card that has a balance of the credit limit. So if the credit limit on your credit card is $3000 and you’ve spent that full amount without making any payments, you have a maxed-out credit card. Experian says this could result in a number of consequences, including:
- Over-the-limit fees
- Possible decrease of your credit line
- Increase in your credit card interest rate
- Temporary reduction of your credit score
- A credit card issuer could choose to close your account
The amount of your credit card balances relative to your available credit (known as credit utilization ratio) helps creditors determine the risk they assume from a credit applicant. For this reason, a maxed-out credit card could cause the issuers of your other credit cards to lower your credit line, or raise your card interest rates — even if you haven’t maxed out those other credit cards.
Determine Why You Have a Maxed-Out Credit Card
Understanding why you have a maxed-out credit card is key to ensuring it doesn’t become a habit that derails your financial life. Here are some common scenarios that can contribute to maxing-out a credit card that you may wish to consider:
1. It was a one-time financial fluke.
Were you traveling with only one credit card, making several large purchases to pay for a home remodel, or have you just paid a large medical bill?
Take steps to course-correct so it doesn’t happen again:
- Stop using the card temporarily. NerdWallet reminds that it’s best to keep the account open, even if you remove the card from your wallet.
- Pay down the balance. Pay as much you can to reduce the balance — and the amount of money you could pay in interest rate charges — each month.
- Sign up for automated alerts. Many credit card issuers provide the option to enroll in automated email or text alerts so you can proactively monitor how purchases impact your balance in the future.
- Establish an emergency savings fund. A common financial rule of thumb is to build a balance of at least three months of your after-tax expenses so you have cash reserves for unplanned or large expenses.
2. You’re living beyond your means.
Don’t have the cash to fund your monthly expenses? Struggling to pay down credit card balances, or not managing your money with a budget?
Take these steps to get your financial life back on track:
- Revisit your budget, and stick to it. If your monthly expenses closely match (or exceed) your monthly income, consider how you can cut costs, or generate an additional source of income.
- Use cash. If you have a maxed-out credit card because you struggle to resist impulse purchases, make it impossible to veer from your budget: Place only the amount of cash you’ve allocated in your budget into envelopes when you shop.
- Pay down credit card balances. Credit card balances are difficult to pay down when you make only the minimum payment due each month — particularly if you have a card that charges interest. Make consistent, on-time payments toward your credit card balances each month and stop using the cards until you’ve paid the balances down.
3. You have a low credit line.
If you’re just building credit and/or have a secured credit card, your credit limit may be only a few hundred dollars. This isn’t a sure sign you’re overspending, but it does present an opportunity to learn the ins and outs of credit.
- Manage debt utilization for a positive credit score. The amount of credit you use compared to your total available credit is an important factor in your credit score calculation: Keep all balances well below the available credit line.
- Prove to creditors that you can manage a higher credit limit. Your credit history and credit score indicate how you’ve managed other credit products: Limit the amount of credit you use, pay your bills on time, don’t apply for credit frequently, and keep your credit accounts open for the long term.
Eventually, CreditCards.com says your issuer may be willing to increase your credit limits and/or offer you other credit cards because you’ve proven to have a strong understanding of how to use credit to support — but not fund — your financial life.