What happens if you max out your credit card?
A credit card can be a great tool for settling unexpected bills, or purchasing a much-needed item before payday arrives. However, what happens if you spend to your credit limit?
We consider the consequences of doing this, including the impact it will have on your interest-free benefit and your credit score.
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The consequences of maxing out your card
When you spend 100% of your available credit limit, you will have maxed out your credit card. In other words, your debt-to-credit ratio will be at its maximum limit.
This leaves you in a precarious position. You will no longer be able to use your credit card, which leaves you at risk in the case of an emergency situation. Furthermore, if you exceed your credit limit, you may be liable for additional fees from your credit card provider. The exact fees will depend on your credit agreement.
The following important factors should also be kept in mind.
1. You may forgo your interest-free benefit
Danie van Niekerk, executive head of Financial Services at Indwe Blue Star, says that the majority of financial institutions provide an interest-free period on their credit cards. For example, if your credit card provider offers you 55 days interest-free, and you repay your debt within 54 days, you won’t be liable for any interest payments.
“The convenience of having an interest-free credit facility is considered a big advantage over using your general current account or a personal loan,” says Van Niekerk.
However, if you max out your credit card, you run the risk of not being able to repay the amount you borrowed on time. It’s much easier, for example, to repay R3,000 over 55 days than to come up with R10,000, supposing your credit limit is set at this amount.
In short, by maxing out your credit card, you increase your chances of paying interest on your outstanding balance, and you may forgo the benefits of an interest-free period
2. Your credit score may decline
The credit bureaus keep a close eye on your credit utilisation. If you keep this below 30%, then your credit score will be stable. However, if you exceed this amount, your score may suffer.
You may be under the impression that it’s okay to max out your credit card, as long as you pay it back in full within the month. However, if your credit card provider happens to report your credit behaviour to the bureaus before you have paid it back, your credit score will reflect this. If you have maxed out your credit card, it’s important to reduce your credit utilisation to 30% at most, as soon as you possibly can.
“By using your credit facility responsibly, you will demonstrate to future lenders how well you can manage your finances,” says Van Niekerk.
He explains that having a credit facility can have a positive impact on your finances. However, if used incorrectly, it may well create the impression that you are reliant on credit and struggling with debt.
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