How Maxed Out Credit Cards Affect Your Credit Score
Running up your credit card balance is not a good idea, but sometimes it’s the only option for financially-strapped consumers. A recent study found almost 16% of American adults in the 50 biggest metropolitan areas have at least one maxed out credit card. Before you drain your credit lines, you need to understand how maxed out cards affect your credit score.
Your credit score is comprised of several components: payment history, credit utilization, length of credit history, new credit lines, and your credit portfolio (the types of accounts you have open). Each bureau has its own formula for calculating your score, but those factors are consistent in all of them.
Maxed out credit cards impact your credit utilization. This is a ratio comparing your available credit to the amount of credit you’ve used. If you have $10,000 in available credit between all your credit cards and you’ve spent $2,500, you have used 25% of your available credit. Ideally, your credit utilization should stay below 30% to maintain a good credit score.
Depending on which credit card you max out, you could push your credit utilization rate above 30%. If you max out a credit card that represents 50% of your total credit lines, your score will take a hit. If you max out a small credit card, it may not do much damage.
In the metropolitan area study, the highest average utilization rate was 33.2% in Virginia Beach, Virginia, where 17.1% of adults have at least one maxed out card. Even in areas where a large volume of consumers have a maxed line of credit, the overall utilization rate remains low enough to preserve a person’s credit score.
If you have to max out a credit card to cover your upcoming holiday expenses, choose the card with the lowest interest rate or best rewards system. The rewards you get may offset the extra interest you pay. Only spend what you can realistically pay back, and create a repayment schedule now to follow in the coming months. Set a budget and stick to it to avoid excess debt and financial stress. As long as you keep your credit utilization at a reasonable figure, your credit score should remain unharmed.