4 surprising ways to maximize your credit card can hurt you
Credit cards have credit limits or maximum spending limits. For some card users, this limit is considered a cap, and charging up to it seems like a good idea. Unfortunately, if you are one of those card users, you could be hurting your finances by maximizing your card.
How is maximizing your card hurting you? There are actually a number of surprising ways in which loading too much on your card can negatively impact your financial situation.
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1. Maximizing Your Cards Can Hurt Your Credit Score
Your credit score can affect your ability to borrow money, rent an apartment, get a cell phone, or do business with many businesses. Lenders, homeowners, and businesses often check your credit to determine if you will be responsible and trustworthy in doing business with them.
Unfortunately, if you max out your credit cards, your credit score can take a hit. This is because your credit utilization rate is one of the most important factors taken into account when calculating your score. The credit utilization rate is calculated by dividing the outstanding balance by the maximum credit you have on each card. If you owed $ 2,000 on a card with a $ 10,000 line of credit, you would divide $ 2,000 by $ 10,000 to get a 20% usage rate.
Your credit usage rate should be as low as possible, and definitely less than 30%, to avoid damaging your credit score. But, if you have maximized your cards, it won’t happen. If you use $ 10,000 of your $ 10,000 available credit limit, your usage rate is 100% and your credit score will be much lower because of it.
2. You run a greater risk of incurring over-limit charges or triggering an APR penalty.
If you go over your credit limit, many credit card issuers will charge a fee. And if you violate your cardholder’s agreement by exceeding the limit, you may be charged an APR penalty. Your penalty APR can be as high as 29.99%, which is likely much higher than your standard interest rate. If your interest rate goes up, your debt will be much more expensive to pay.
Unfortunately, if your credit cards are at their max, you are approaching that limit. If you underestimate your spending by a small amount, or your card receives recurring charges at the wrong time, it could push you past the limit, triggering the charges and the huge APR jump.
3. Your debt-to-income ratio could climb too high
When you have a lot of debt on your credit cards, it increases your required monthly payment. When you apply for other loans, like a home loan, lenders often look at how your monthly income compares to your monthly debt. This is called your debt-to-income ratio (DTI).
If your DTI ratio is too high, you may no longer be able to borrow money or be limited to high interest loans with adverse terms because lenders see you as a significant credit risk. This means that you might find yourself unable to buy a house or go back to school just because that card at maximum makes your DTI too high.
4. You will not have credit available when you need it.
Sometimes emergencies arise and you just don’t have the money to cover it. And while it’s best to have an emergency fund so you don’t get into debt in these situations, it’s not always possible for everyone. If you don’t have emergency funds but have credit available on your cards, you can at least turn to these cards to pay the bills needed to handle the emergency.
If you don’t have any available credit because your cards are at maximum, this won’t be an option. You might end up feeling like you have no choice but to use very high interest rate debt, like payday debt or car title debt, just because you have already exhausted the credit offered to you on your cards. .
Avoid Maximizing Your Credit Card
As you can see, maximizing your credit card can be a really bad idea. In fact, you should aim to keep your card balance below 30% of your maximum available credit. To make sure you’re not overcharging, keep your spending limit in mind and pay off your debt as soon as possible.
If you’ve already used your card to the max, you might want to consider a balance transfer offer to help you get out of debt faster – or just work on making extra payments so you can bring that balance down to a low. reasonable level. Your credit and DTI ratio will be better once you do, and you’ll have credit available if and when you really need it.