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How to Tackle Maxed-Out Credit Cards

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In a Nutshell

Reaching your credit card limit without the ability to pay it off at the end of each month can have substantial financial consequences. Fortunately, there are things you can do to manage your credit card balances. This article will cover some of the downfalls of having high balances on your credit card debt as well as some of the things you can do to start tackling those maxed-out credit cards.

Written by Natasha Wiebusch, J.D.
Updated July 30, 2021

You may think you’re the only one with too much credit card debt. But about 40% of Americans can’t pay more than the minimum required payment on their credit cards each month. Credit card debt also increased during the pandemic as many Americans lost their jobs or experienced pay decreases. Unfortunately, reaching your credit card limit without the ability to pay it off at the end of each month has substantial financial consequences. This article will cover some things you can do to start tackling your maxed-out credit cards.

What’s a maxed-out credit card?

A maxed-out credit card is a credit card that has no more available credit. In other words, it has reached its credit limit, and the person who owns the credit card can no longer make purchases with it. The credit limit is the total amount of money you can borrow from a creditor, usually a bank. Credit limits are determined by the creditor through a process called underwriting. This is a mathematical process creditors use to calculate the financial risk of lending money to a person. This process helps the bank determine how much money to lend and at what interest rate. 

There are many reasons why a person may max out their credit card. Maybe you lost your job but still have to pay bills. Maybe you experienced an unexpected emergency that forced you to pay for something using your credit card. Or, maybe you were living beyond your means and didn’t realize it until it was too late. Of course, some situations are simply out of your control. Still, there are some things you can do to avoid maxing out your credit card. 

  • Create a monthly budget.

  • Check your balance every week. 

  • Review your charges to understand what you’re spending money on.

  • Keep an emergency fund.

  • Pay off your balance regularly.

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Consequences of Maxing Out Credit Cards

Maxing out your credit card has serious financial consequences. If you use your credit card for necessary purchases like household products or medication, you may find yourself unable to buy them. Aside from the immediate impact, maxing out a credit card will have future consequences for your financial health.

Drop In Credit Score

Maxing out your credit card can decrease your credit score, which can limit your ability to obtain loans from lenders. This happens because credit scores are calculated in part by looking at your credit utilization ratio. This ratio represents how much of your available credit you are currently using. It’s calculated by adding up your credit lines to determine the amount of credit you have available and then comparing that to how much of that credit you have used. The amount you have used is the amount you owe to the creditors. To keep your credit score up, you want to keep your credit utilization ratio low. The general recommendation is to keep it below 30%.

For example, let’s say an individual has the following credit lines: 

Credit Card 1: 

  • Credit limit: $8,000 

  • Current balance: $2,300

Credit Card 2: 

  • Credit limit: $12,000

  • Current balance: $7,000

In this case, the total available credit is $8,000 plus $12,000, which is $20,000. The amount of the total available credit that they’re using is $2,300 plus $7,000, which is $9,300. The credit utilization ratio is the percentage of the total available credit that $9,300 represents. In mathematical terms, it’s $9,300 divided by $20,000, which is 46.5%.

Credit bureaus, which are agencies charged with calculating your credit score, view high credit utilization rates negatively because they signal that the borrower isn’t able to make their payments. Because credit bureaus view higher credit utilization ratios negatively, the higher the ratio, the lower the credit score. Experian, a credit bureau, reports that consumers with a FICO credit score of 800 typically have a credit utilization ratio of 11.5%.

Having good credit is important because it allows you to obtain loans. If you’re not sure what your current credit score is, you can request a free credit report. Also, most banks now provide free credit scores if you enroll in their credit score program.

Higher Minimum Payments

A minimum monthly payment is the minimum amount of money the credit card issuer is willing to accept every billing cycle. Since minimum credit card payments are calculated using the total balance and interest rate, maxing out your credit card will increase your monthly minimum payment. If you aren’t able to make minimum payments, or if you keep making late payments, the credit card issuer may impose penalties and take further action to get their money back.

Triggering Penalty Rate

The penalty interest rate is the highest rate a credit card company can charge. A penalty interest rate can be 30% or higher, depending on the terms and conditions you agreed to when you received the credit card. A credit card company can start using the penalty interest rate once the credit cardholder defaults by exceeding the credit limit. In addition to charging a higher interest rate, credit card companies can also issue additional penalties, which can push the cardholder further over the credit card limit and further into debt.

Difficulty Paying Off the Balance

A maxed-out credit card balance could take years to repay depending on your credit limit. It’s particularly difficult if you can only make the minimum monthly payments since the interest will add to the balance every month, causing your debt to snowball.

Lesser Chances of Getting a Loan Approval

Because maxed-out credit cards lower your credit score, they can prevent you from obtaining a mortgage for a house, a car loan, and other types of loans. Additionally, high balances like maxed-out cards indicate to lenders that it is risky to lend to you since you have a poor payment history.

Steps to Manage Maxed-Out Credit Cards

If you’ve maxed out your credit card, you’re not alone. But it’s important to realize there are steps you can take to begin paying the maxed-out credit card off.

1. Temporarily stop using credit cards.

If your credit card is maxed out, you can no longer use it. Even if you have other credit cards available, the best thing you can do is to stop using your credit cards. This is true even of cards with low balances.

2. Create a budget.

If you were using your credit card to make purchases for your living expenses, you’ll have to make adjustments so that you can use your income instead of credit cards. To do this, create a budget to get a better understanding of your expenses as well as a solid spending plan for the month. By budgeting and creating a spending plan, you’ll be able to spend within your means and start the process of getting out of debt.

3. Get professional assistance.

Dealing with credit card debt is both stressful and complicated. Luckily, credit counseling is available from accredited, nonprofit credit counseling agencies. A credit counselor can help you navigate your credit card debt and provide you with options. Credit counselors are financial professionals who specialize in helping individuals and families become debt-free through personal finance coaching and counseling. They can negotiate with creditors to reduce your debt's interest rates, offer a more manageable repayment plan, help you enroll in a debt management program, and otherwise counsel you through the debt repayment process.

If you’re having trouble paying off your debt and need assistance with debt management, seek professional advice from a trained credit counselor.

4. Transfer the balance.

Credit cards often have very high interest rates which contribute to high monthly payments. Doing a credit card balance transfer can help. These cards often have a 0% interest rate for a period of time, which will lower your monthly payments and ultimately help you pay off the credit card even if you don’t have much money.

To transfer your credit card balance to a balance transfer credit card, you have to qualify. To be eligible, you typically need to have a credit score of 690 or higher and a low credit utilization ratio. If you choose to obtain a transfer card, remember that this is not just a new credit card. It should be used to pay down your debt, not to purchase items.

5. Consider consolidation.

Similar to a credit card balance transfer,  debt consolidation through a personal loan can lower your monthly payment. Personal loans typically have lower interest rates than credit cards. To do this you can either transfer only the balance of the maxed-out credit card or consolidate all of your debt and place it into one personal loan. The consolidated personal loan will provide a fixed monthly payment and a fixed payment schedule. It can also help you improve your credit score.

Should you consolidate debt? It depends on a few factors including how much total debt you have, what kind of loan you qualify for, and how much you can afford.

Let's Summarize...

Maxing out a credit card is not as uncommon as you might think, particularly for those who lost their jobs during the COVID-19 pandemic. Still, maxed-out credit cards can cause a lot of stress. They also have serious financial consequences, including lowering your credit score.

If you’ve maxed out your credit card, don’t give up. There are things you can do to make your payments more manageable so that you can get back on track and start paying off your debt. If you’re feeling overwhelmed or you’re not sure where to begin, contact a credit counseling agency. A credit counselor will be able to analyze the situation and give you some recommendations.

Written By:

Natasha Wiebusch, J.D.


Natasha started her career as a lawyer representing labor unions and other investors in multi-state class action lawsuits. Passionate about the civil rights elements of her cases, she moved into practicing employment law to represent employees against discrimination of various ki... read more about Natasha Wiebusch, J.D.

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