A maxed out credit card is a credit card whose credit limit is equal to the total amount spent on the card. If you know about credit cards, you would remember each credit card has a maximum limit you can spend on it. It is there for a reason. This is because there are consequences to maxing out a credit card.
Besides hurting your credit card badly, the terms and conditions of your credit card will tend to change once you have reached a credit card limit. What do I mean by a change in terms and conditions, my good reader?
Well, the interest rate of your credit card will change the more debt you accumulate on your credit card. I discussed about this on 6 Important Research Before Getting A Credit Card. A monthly interest rate which is up to 50% of your monthly minimum payment makes it hard to pay off a maxed out credit card. I have had such an experience where I had a monthly minimum payment of $107.25 and an interest rate payment on purchases was $78.
I would not lie. It was a struggle paying off the maxed-out credit card as a college student. This is because when you think about it, only $29.25 out of my minimum monthly payment was going into to my actual credit card debt. The rest of my $107.25 went into paying the interest. Do you see what I mean now?
Credit card companies are not your friend at all. Anyways, I am not here to talk to you about how credit card companies use college students as money cows. Let us go back to the issue at hand: A Maxed-Out Credit Card and Its Impact On You. Here is what happens when you max out your credit card.
Max Out Credit Card Consequences
When you max out a credit card, it is not without penalties. You can read what happens when you max out your credit card for more details on consequences. As previously mentioned, credit card institutions are out to make money. As a result, they will always try every nook and cranny within a legal frame work to maximize their profit.
Here is what I mean.
There is a financial penalty for reaching or going over a credit card limit. Firstly, it will increase your monthly payment. If you were paying a certain minimum monthly amount towards an existing credit card debt, this amount will increase. It is hard to renegotiate to pay the same minimum monthly amount you used to pay, when you max out a credit card.
Your credit card institution is out to make money.
Secondly, maxing out a credit card means your interest rate will change. It will not change for better, but for worse. Simply put, you would have to pay more in debt interest. This is because of what I mean earlier by the terms and conditions of your credit card changing as a result of your maxed out credit card.
With a fixed income and a series of fixed monthly expenses, you may struggle to pay off your new credit card debt. When you miss a payment deadline, even if it is for a day, you will be charged a late penalty fee. This is in addition to your monthly minimum payment and the new interest on your maxed out credit debt. As a consequence, your total credit card debt increases.
Finally, missed payments are reported to credit bureaus. You get penalized with credit points deduction, which is one of the things that ruin your credit score. Imagine juggling through all of these, while trying to maintain a semblance of a normal work-life balance. Dealing with a maxed out credit card is stressful.
How A Credit Card Gets Maxed Out
Your credit card can easily get maxed out. It is not a rare event at all. According to What Matters To You Organization, 1 out of 5 Americans with a credit card has a maxed-out credit card. This is about 20% of all credit card holders. A maxed out credit is an indicator of a lifestyle problem.
What do I mean by this, my dear reader?
Maxing out a credit card means you are living above your means. You are not living within a budget. If you had to max out your credit card to purchase a service or product, then it means you cannot afford it. This is especially, when your sole purpose of using a credit card is not to build a credit history.
Think about it.
When you max out a credit card, it means your current lifestyle cannot be sustained by your current income. It is a brutal truth a lot of young working class adults are yet to confront. Unless your monthly income exceeds your credit card limit, you have no business utilizing more than 30% of the card limit.
I explore these things on what not to do with your credit card after getting one.
You simply cannot afford to utilize more than 30% of your credit limit without maxing out. That is how easy it is to reach a credit limit, because more than 30% utilization can easily change to 40% and so on. So, my recommendation is for you to stay below a 30% utilization especially on a fixed monthly income less than your credit card limit.
How Many Credit Cards You Can Max Out
There is a maximum limit on most credit cards, but no limits on the number of credit cards you can have. This is not a revelation to be irresponsible with credit cards. My purpose of revealing this, is to show you how easy it is to mess up your life for good with crippling debts.
Our dear country, the United States of America, has made it easy to get as much credit cards as you can get. This is as long as you have a good credit history and a good credit score. But, this is to your detriment since it enriches credit card companies at your expenses.
Here is what I mean.
Usually, a credit card limit ranges from $2000 to $5000 for beginners. If you have about three cards with a limit of $5000 on each and you maxed out on two, that is $10,000 in debt. $10,000 will not be your real debt though. Counting in the fees like missed payment fee or interest on purchases can rack up quite a sum. Best believe your total debt will exceed $10,000 by the time of your first monthly minimum payments on the two credit cards.
I recommend not owning more one credit card to avoid the temptation of being entitled to the second card as a back up. If you owe multiple credit cards, there is no law prohibiting from maxing them all out. But, this would mean unnecessary debts crippling your young working class life. So, I will not recommend owing more than one credit card or maxing that one out!
To learn more about maxed out credit cards, check out my article: Should You Max Out A Credit Card?
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