IndiaLends Advisory

By IndiaLends Advisory

Apr 07, 2018

Reasons To Never Max Out A Credit Card

Credit cards come with a credit limit. It is the maximum you can borrow on the card. Maxing out a credit card means spending enough on your card to reach that credit limit. Even though most credit card issuers provide you a decent credit limit of ₹50,000 to ₹1 lac, they don’t intend for you to reach it. The fact is that if you do max out your credit card, it will play against you and not for you.

Here’s what to expect:

Your Credit Utilization Will Rise

The more credit you utilize on your card, the higher your credit utilization is.

What does that mean?

Well, if you have a credit limit of ₹1 lac, and you have used ₹70,000 of it already, your credit utilization is 70%. This is not good at all! But what’s worse is that if you max out your credit card, your credit utilization is at 100%.

It is highly recommended that you not have a credit utilization over 50% of your available credit. Maxing out your credit card once or twice is alright. However, lenders absolutely hate it when you make it a habit to keep your credit utilization over 50%.

Your Credit Score Might Drop

A large portion of your credit score– about 30% to be precise– depends upon your credit utilization.

What does that mean?

It means that the higher your credit utilization, the further your credit score will drop. If you make a habit of keeping your credit utilization over 50%, your credit score will stay low. And if you keep maxing out your credit cards, your credit score will likely not recover.

Even if you’ve hit a high credit utilization, you can make things better by changing things in future. Start using your card less, and making your payments on time, and things can get back on track.

Your Minimum Payment Will Get Higher

The minimum payment on your credit card bill depends directly on the credit utilization.

What does that mean?

The more you use your card, the higher your credit card due will me. And the closer you are to maxing out your card, the higher your minimum payment will be.

Also, remember that the minimum payment is only a small fraction of your total dues. It only helps you avoid penalty charges and it is not a good idea at all! You will be charged interest on the amount that you do not pay, and that makes it easier for your debt to stack.

What’s a Reasonable Credit Card Balance?

Well, truth be told, its the best to keep your credit card dues below 50% of your credit limit. That is typically a good amount, and it is going to help you keep a good credit score. It is also an amount that is acceptable to lenders, and will likely not land you in any financial trouble. To avoid maxing out your credit card, ensure that you keep a tab on your credit utilization and your credit limit.