How Maxing Out Your Credit Cards Affects Your Credit

Credit Card Limit

Credit cards have limits for a reason, and exceeding yours is harmful to your overall credit health.

While everyone occasionally finds themselves with an emergency bill that requires stretching finances, it’s better in these situations to find alternative payment methods to credit cards, rather than exceeding your credit limit.

Otherwise, your credit could very well suffer.

Credit utilization

The amount of credit card debt you carry is closely linked to your credit health. Credit utilization is a ratio that compares your total debt to your overall credit limit. It’s an important number to pay attention to, as it accounts for around 30 percent of your credit score. For optimal credit health, the your total debt should be below 30 percent, and ideally 10 percent or less of your overall credit limit.

Maxing out your credit cards can ding even good credit scores by up to 45 points, and exceeding your credit limit can be even more harmful. According to the folks over at FICO, regularly exceeding 100 percent credit utilization (meaning going over your credit limit) could mark you as a high-risk borrower, and make lenders think twice about extending credit to you.

There are other penalties to exceeding your credit limit as well. Your account could be closed, or your credit limit could be lowered — which would result in your balance being even further over the new limit. You could find your interest rate — and therefore, your minimum monthly payment — increased, making your debt harder to pay back. And if you’re late in making these payments, your credit could be damaged even further.

How to exceed your credit limit

Here’s the good news: most credit cards won’t just allow you to exceed your credit limit. Thanks to the CARD Act, credit card issuers can only allow consumers to exceed their limits if the consumer opts in to such an option and sets a limit on over-the-limit fees (fees are generally $25 the first time and up to $35 the second). Unless you’ve opted into an over-the-limit program, your card will likely be declined if you are about to make a purchase that would exceed your limit.

However, it’s worth noting that one way to exceed your credit limit without actually making a purchase is by accumulating interest or late fees. If you’re already close to maxing out your card, these fees could very well put you over your set limit. This is why it’s a good idea not let your debt get that close to your credit limit.

What to do to avoid exceeding your credit limit

The first and most obvious option is not to opt into over-the-limit programs. However, some people may feel that they need the financial safety net in case of emergency situations. If you do opt in and end up exceeding your credit limit, make sure to pay off the balance as soon as possible. If you pay it off before your next billing date, it’s possible that your card company won’t have reported it yet to the three major credit bureaus, which means there’s a good chance it won’t be reflected on your credit report. (Check with your credit card company to learn how it reports going over your credit limit.) Finally, if you find yourself in a cycle of debt that you can’t get out of, consider consulting a credit repair expert.

Credit repair isn’t just for those with bad credit. Working with a professional can help you monitor your credit and ensure that it remains good going forward. It can also help you to more quickly identify, and fix, problems or errors on your credit report that can lower your score.

If you’d like to learn more about how you can benefit from working with a reputable credit repair expert, contact today.

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