What is a Credit Card Limit?
Credit cards have a credit limit on them. Basically, it is the maximum amount which one can spend from their card. When you use the entire limit available on your credit card or when very close to exhausting the maximum limit, it means you have maxed-out your credit card balance.
For example- you have a credit card, and your card limit is ₹ 1.5 lakhs. This means you can use your card till it reaches ₹1.5 lakh. If you use it till the maximum limit, the overall balance due will be ₹1.5 Lakh, and this means you have maxed out your credit card.
Why You Should Never Max Out Your Credit Card?
A maxed-out credit card is a big thing which can have serious consequences. Some of them are heavy penalty charges and a low CIBIL score.
Consequences of having Maxed Out Credit Card
There is a Drop in your Credit Score
Using your credit card till the maximum limit can hurt your credit score. This is because the amount you utilize from the available credit limit defines your Credit Utilisation Rate. Credit utilization rate is defined as the ratio of your outstanding debts to the sum of each card’s credit limit. The ideal CUR is 30% of the available credit limit to you. Credit utilization and credit score are inversely proportional to each other. The lower the credit score drops, the lenders are not in favour to lend you. Hence, it becomes very important to have a good credit score as a low score can prove to be a red flag for your borrowings in the near future.
Maxing out credit card balance lowers your credit score. However, slowly it can recover as you pay down your balances, but you need to stop creating more debt in terms to improve that.
You May Get Stuck in a Debt Cycle
When you utilize the entire available limit of your credit card, that means you need to pay a lot. Converting your transactions to EMIs for the repayment can help, but only to an extent. Keeping the EMI low will not reduce much of your outstanding bill, as the interest rate on the credit card is high. And principal along with interest sum it up to a huge amount, which is difficult to clear. This further starts a debt cycle as you need to take yet another loan to clear this one. Hence, using your credit card to the maximum limit may lead to difficulty to manage your dues at once.
You Could Trigger the Penalty Rate
Credit card companies can raise the interest rate charged on the off chance that you default on your credit card by surpassing your credit limit. The penalty rate is the most noteworthy which your credit card issuer can charge, and it could be a 30 percent or even more depending upon your credit utilization. A high-loan cost connected to a high equalization can be appalling since it may mean you are making enormous regularly scheduled installments that are being connected distinctly to intrigue and not bringing down your outstanding bill.
Banks/NBFCs can Decline your new Application for a Loan/Credit Card
While approving a loan or a credit card application, lenders check your entire credit report and credit history to know any irregularities in your payment for previous loans or borrowing.
Having a maxed-out credit card increases the risk of default to the lenders. And this is the reason most of the lenders reject the loan application of such applicants. In case of any loan approval, the loan is approved at a higher interest rate than others.
Your Minimum Payment is Raised
The minimum payment for your credit card depends on the card’s outstanding balance. Generally, it is 5% of the total outstanding amount which you owe. Your minimum payment increases with the increase in your outstanding credit bill. Hence, hitting your credit limit raise the minimum amount which you need to pay every month.
Even paying the minimum payment will not impact your credit balance much as default will do. But paying the minimum will not either end your outstanding debt for the long term.
Avoid reaching the maximum limit of your credit card, if there is no other option left, you can request a credit limit increase to your lender. If they refuse to do so, you can pay your credit card off more than one time in a month instead of just paying the minimum balance that too once in a month.
The best option to avoid such a situation is, clear the outstanding balance as soon as possible, don’t let bills to be piled up to become a tension for you.
