Why you should never max out your credit card
Keeping a low credit balance will not only improve your credit score and increase your eligibility for a new card, but also reduce the risk for lenders to sanction your loans.Updated: Feb 14, 2018 17:15 IST
Nobody buys a credit card with the intent to max out its credit limit. But the state-of-the-art gadgets around us make it difficult for us to resist ourselves from using our credit card for such worldly pleasures. However, leaving these bills unpaid at the end of the month will only lead to further debts. Continue this for too long, and you will realise that you’ve maxed out your credit card. Not only will this cost your thousands of rupees in interest on those high debts, but it will also lower your buying power in the future. Hence, it is imperative to understand the consequences of hitting your credit limit and know the ways you can prevent it. Here’s a list of reasons why you should never max out your card:
●It affects your credit score
Hitting the credit limit on your card can have a negative impact on your credit score as the amount you utilise from the available credit defines your Credit Utilisation Rate (CUR). CUR is defined as the ratio of your outstanding debts to the sum of each card’s credit limit and an ideal CUR would be 30% of your available credit limit. Credit utilisation and credit score are inversely proportional. That is, the higher the CUR is, the lower the credit score drops. It is vital to have a good credit score as a low score can prove to be a red flag when credit issuers run through your credit report when issuing a new credit.
●The risk of surpassing your credit limit increases
One may think that he/she wouldn’t have to worry about hitting the credit limit if they’ve maintained a credit balance just under the credit limit. However, there is a possibility that you may go over your limit once the interest charges are brought about on your credit balances. If you’re the kind of person who pays only the minimum every month, a majority of the payment is likely to be utilised on the interest rather than the actual debt.
●Your credit card turns expendable
Credit card is a convenience tool that is used during emergencies. If you’ve already maxed out your card, how can you utilise it to make a purchase if you haven’t paid down your debts? Remember, credit card debts pick up with time as the credit balances increase with the interest rates. Hence, it is crucial that you make your payments on time to bring down your balance so that you can use your card in case an emergency arises.
●Credit lenders can decline your application for a new loan/credit card
If you believe that having a good credit score alone can get your application approved, then you are wrong. In fact, credit issuers run through your entire credit report and credit history to check for any irregularities in your payment pattern. Having a maxed out card increases the risk of lending for the lender. This may result in your application being rejected. In some cases, issuers can also lower your credit limit considering the fact that you’ve maxed out or gone over your credit limit.
This will, in turn, affect your credit score by increasing your credit balance-to-credit limit ratio. So, it is imperative to make sure that you never go over your credit limit. Paying your balances on time will only have a positive impact on your credit history. Not only will it improve your financial well-being, but also improve your personal loan or auto loan eligibility.
●Your minimum payment is raised
The minimum payment on a credit card usually depends on the card’s outstanding balance. The minimum payment is usually 5% of the total outstanding bill. Your minimum payment increases proportionally with your credit balance. Hence, going over or hitting your credit limit will raise the amount you’re supposed to pay every month. Remember, paying a minimum will not impact your credit balance much as a major part of the amount covers only for the interest rate on the high balance.
●A penalty rate can also be imposed on your interest rate
Credit card issuers can also raise the interest rate on your card if you fail to repay your balances after going over your credit limit. Your total outstanding balance can increase drastically if a higher interest rate is imposed. This can hamper your repayment plan. In such situations, it is best to talk to your bank and ask them for a repayment strategy as you are unable to pay off the bill. Most of times they will oblige with an EMI plan that will help you clear it in no time at a fixed rate of interest.
Remember to always keep a low credit balance. This will not only improve your credit score and increase your eligibility for a new credit card but also reduce the risk for lenders to sanction your loans. Make it a habit to utilise your cards only for urgent needs or emergencies. Ensure that you clear off your debts as soon as you can by creating a feasible credit balance repayment plan.