Why you should never max out your credit card

Why you should never max out your credit card

No one buys credit cards with the intention of maximizing their credit limit. But the state-of-the-art gadgets around us make it difficult for us to restrain ourselves from using our credit cards for such mundane pleasures. However, non-payment of these bills at the end of the month will only add to the debt. Continue this for too long, and you’ll feel like you’ve hit your credit card maximum. Not only will this cost you thousands of rupees in interest on those high loans, but it will also reduce your purchasing power in the future. Therefore, it is imperative to understand the consequences of exceeding your credit limit and know the ways to prevent it. Here is a list of reasons why you shouldn’t make the most of your card:

It affects your credit score

Exceeding the credit limit on your card can have a negative impact on your credit score because the amount you use from available credit defines your credit utilization rate (CUR). The CUR is defined as the ratio of each card’s credit limit to your outstanding loans and an ideal CUR would be 30% of your available credit limit. Credit utilization and credit score are inversely proportional. That is, the higher the CUR, the lower the credit score. Having a good credit score is important because a low score can prove to be a red flag when credit issuers go through your credit report while issuing a new one.

Your risk of exceeding your credit limit increases

One may think that if he has maintained a credit balance just below the credit limit, he will not have to worry about the credit limit running out. However, there is a possibility that you may go over your limit after interest charges are levied on your credit balance. If you’re the kind of person who makes only the minimum payment each month, most payments are likely to be used on interest rather than on the actual loan.

Your credit card becomes spendable

A credit card is a convenience tool used during emergencies. If you’ve already maxed out your card, how can you use it to make purchases if you haven’t paid off your loans? Remember, credit card debt builds up over time as the credit balance increases with interest rates. Therefore, it is important that you make timely payments to reduce your balance so that you can use your card in case of an emergency.

Credit lenders may reject your application for a new loan/credit card

If you believe in being good credit score Your application alone can be approved, so you are wrong. In fact, credit issuers check your entire credit report and credit history to check for any irregularities in your payment patterns. Having a maximum out card increases the lending risk for the lender. This may result in your application being rejected. In some cases, issuers may lower your credit limit, taking into account the fact that you have maxed out or exceeded your credit limit.

This, in turn, will affect your credit score by increasing your credit balance-to-credit limit ratio. Hence, it is imperative to ensure that you never go over your credit limit. Paying your balance on time will have a positive effect on your credit history. It will not only improve your financial well-being, but will also improve your personal loan or auto loan eligibility.

Your minimum payment has been increased

The minimum payment on a credit card usually depends on the outstanding balance of the card. The minimum payment is usually 5% of the total outstanding bill. Your minimum payment increases proportionally with your credit balance. Therefore, exceeding or eliminating your credit limit will increase the amount you have to pay each month. Remember, making the minimum payment will not have much impact on your credit balance as a large part of the amount is covered only for the interest rate on higher balances.

Penalties may also be imposed on your interest rate

Credit card issuers can also increase interest rate on your card If you fail to pay your balance after going over your credit limit. If a higher interest rate is charged then your total outstanding balance can increase drastically. This can disrupt 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 the bill. Most of the times they will be oblige with an EMI scheme which will help you to cover it in no time at a fixed rate of interest.

Always remember to have a low credit balance. It will not only improve your credit score and increase your Eligibility for a new credit card But also reduce the risk of lenders approving your loan. Make it a habit to use your card only for urgent needs or emergencies. Make sure that you can clear your loans at the earliest by creating a viable credit balance repayment plan.

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