April 10, 2019 • 4 min read by AJ Smith
Paying with plastic can make your money seem limitless. But credit cards come with a credit card limit, which is the maximum amount you can charge on the card. When you charge the card’s full limit, you max out that credit card. Even if you pay enough each month to pay off your balance in full a few months after maxing out your credit card, you may pay the price of a lower credit score along with the bill. You also run the risk of not paying enough or adding more charges to exceed your limit and end up paying a fee or penalty.
And if you can’t pay off a maxed out card quickly, the resulting credit card debt is hard to pay down. Interest increases your original account balance—month after month after month. And that debt can lead to an even bigger impact on your credit score, not to mention your budget.
Your debt-to-credit ratio, also known as your debt usage, balance-to-limit ratio or credit utilization ratio, is the percentage of your available credit limit that you’ve used or charged. You can easily calculate your utilization ratio. Simply divide your credit card balance by your available credit line—the card’s limit. For example, if the card’s limit is $2,500 and you have a balance of $900, your credit utilization ratio is 36%.
Most credit experts suggest keeping your credit utilization rate below 30%. Less than 10% is even better. For credit-scoring purposes, credit utilization is calculated for each individual card and total overall revolving credit.
Examples of non-credit card revolving credit include credit lines, like home equity credit lines. Potential lenders see a higher ratio as a potential red flag and you may have trouble getting approved for a loan, mortgage or a new credit card if yours is high.
If you can max out a card and pay the full balance off on or before your next bill due date, your ratio won’t be affected. That’s because a credit card issuer only reports your information to the major credit bureaus once a month.
If you don’t pay it off, to improve your debt-to-credit ratio you can pay down your debt or increase your credit limit. Either option—or both—lower your ratios. A third option may be to make multiple payments during a month to keep the balance you owe at 30% or less of your limit.
When you max out your credit card, your credit score takes a hit. Debt usage or credit utilization makes up 30% of your credit score. And lenders look at how you’ve handled credit in the past before approving you for loans for big purchases like a mortgage or a car. Even if you’re approved, a lower credit score means you’ll pay a higher interest rate than you might have with a higher score.
It can take years to pay off your credit card debt, especially if you only pay the minimum each month. And if you’re an average American, you’re carrying $4,293 in credit card debt already.1 At an annual percentage rate (APR) of 16.74%, that’s a monthly interest charge of $718.65.
If your financial situation changes for the worse, that debt load can quickly become a burden. And missing monthly payments can further decrease your credit score.
To avoid maxing out your credit card, know your limit and keep track of your balance.
If you’ve already carrying a high balance on a maxed out credit card, consider a balance transfer credit card with a 0% intro APR if you can get approved for one. If you transfer a balance to a card with no interest on balance transfers for 12 or more months, you can put the money you’d pay in interest on the balance toward the balance on the new card instead.
If you’re not sure how your credit utilization is impacting your credit score, you can get your free Experian VantageScore score for free on Credit.com and your FICO score for $1. Your free score includes a credit report card that shows where you stand in each of the five areas that make up your score, including debt usage, AKA credit utilization.