Credit cards come with preset spending limits, or credit limits, that essentially cap how much you can borrow at any given time. For example, if you apply for a credit card and you’re granted a $5,000 credit limit, you can owe up to $5,000 on your credit card at any given time.
If you use up your available credit limit over time or all at once, this means you no longer have any available credit to use for purchases until you pay off some or all of your existing balance. Charging up to your credit limit can be detrimental to your overall financial health, so you should strive to avoid charging up to your credit card’s limit when possible.
You went over your credit limit. What happens then?
Several situations can occur when you exceed your credit card’s limit, and they might all happen at once.
Purchases can be denied
When you spend up to your credit card’s limit, new purchases can be outright denied. This can lead to an awkward situation where you’re trying to pay and the cashier hands your card back because the transaction was declined, or an online payment won’t go through.
That said, some card issuers will approve your over-limit purchases and hit you with an over-limit fee in the process. According to Chase, whether a card will deny your purchases or allow them with an over-limit fee depends on your card issuer. You typically have to opt in to allow your issuer to process over-limit purchases, but a fee will likely result.
Your minimum payment will increase
The minimum payment required on your credit card is based on how much you owe, and it’s typically determined as a percentage of your balance. As a result, using your full credit limit can lead to a higher required monthly payment on your card than if you were carrying a lower balance.
If you’ve been struggling to keep up with credit card payments already, a higher minimum payment may be the last thing you need.
Credit score can plummet
Your credit score is determined by a range of factors, including your payment history, the number of new credit accounts you have, and the average length of your credit history. The second most important determinant of FICO credit scores -- right after your payment history -- is how much you owe in relation to your credit limits. This is known as your credit utilization ratio and you can think of it as how much of your available credit you’re using at one time.
Creditors and lenders prefer to see a credit utilization ratio of 30% or less, which means you should keep your balance at $1,500 or less if your credit limit is $5,000. Using your full credit limit means your credit utilization ratio on that card is 100%, or more than three times what is recommended.
According to FICO, using too much of your available credit can indicate that you’re overextended. Thus, your credit score will likely go down as you use more and more of your available credit and get close to reaching your limits.
Your credit utilization ratio is calculated using the aggregate balances and credit limits across all your cards, so if you have one credit card at its limit and several other credit cards with low utilization, the effect on your credit score will be less severe than if you only had that single, maxed out card.
How to pay off your maxed-out credit card
If you charged up to your credit card’s limit, you’re probably wishing you could rein things in. To get your credit back on track and potentially pay less in interest each month, consider the following tools and tips.
Balance transfer credit cards
Balance transfer credit cards let you consolidate debt with an introductory 0% APR offer for up to 21 months. However, balance transfer fees (typically 3% to 5% of the balance transferred) may apply. Despite having to pay fees to transfer a balance, avoiding interest charges for a period of time can help you pay down your debt faster while saving money.
However, make sure you have a plan to pay off the entire balance before the introductory APR period ends, or the remaining balance will be subject to the normal APR and your debt could start growing again.
Personal loan
You can also consolidate debt with a personal loan, although loans do not come with introductory 0% APR offers. Instead, personal loans let you consolidate debt with a fixed monthly payment and a fixed interest rate that’s lower than most credit card APRs. You also typically have more time to pay them off than with a balance transfer card.
As an example, the average interest rate on a credit card is over 20%. Meanwhile, the average rate on a 24-month personal loan was around half of that, at 11.48%.
Keep in mind to be approved for a personal loan, you’ll need to undergo a hard credit check. Hard credit checks typically will lower your credit score by a few points. However, the drop in score is temporary.
Debt snowball or debt avalanche
The debt snowball method helps you get out of debt by focusing your efforts and extra money on paying off your smallest debt. During this time, you should make the minimum required payments to stay current on your other debts, but not pay extra towards those debts. After you’ve paid off your smallest debt, you’ll move on to your next smallest, and so forth.
Each time you pay off a debt, you’ll have more funds to allocate toward the next one, “snowballing” as you work to get out of debt.
The debt avalanche method works similarly. You pay as much as you can toward one debt at a time, except you focus on your debts with the highest interest rates first. As you pay down debts with the highest interest rates, you’ll “avalanche” those payments into your next debt with the highest rate until all your debts are gone.
Stop using credit cards
If you can, stop using credit cards while you work on paying down your balances. If you keep using your cards for purchases while you’re in debt repayment mode, you’ll make your job considerably more difficult.
How to avoid maxing out your credit card
Your financial health will be much better in the long run if you can avoid reaching your credit limits in the first place. Here’s how you can avoid racking up a credit card balance:
- Build up your savings. Set up a high-yield savings account and save part of your paycheck each month automatically in an emergency fund. Having some savings can help you avoid having to use a credit card for unexpected expenses. In a similar vein, you can set up a sinking fund for large, preplanned purchases and wait to buy something until you can pay with cash on hand rather than carrying a balance on your credit card.
- Cut your regular spending. If you’re regularly charging up to your card limit or getting close, you’re spending beyond your means. Budgeting can help you spend less each month.
- Make multiple payments throughout the month. Paying your credit card bill several times per month can help you avoid using a lot of your credit line, especially if you have a lower credit limit.
- Start tracking your spending. Also, try tracking your spending throughout the month so you know where your money is going. This step can help you figure out areas you’re spending too much in, as well as areas you can cut.
Should you ask for a credit limit increase?
While your credit card issuer assigns you a credit limit when you’re approved for a card, this amount isn’t necessarily set in stone.
In fact, you can always ask your issuer for a credit limit increase. You might have to undergo a hard credit check (similar to if you were applying for a new card) or prove that you have sufficient income to justify the higher limit. Your issuer will look at your personal details to decide whether to grant you the increase and if so, for how much.
Unfortunately, card issuers may be less inclined to grant a credit limit increase if you regularly charge up to your credit card’s limit or you’re often getting close. That’s because a high credit utilization ratio shows you may already be overextended.
You can call your card issuer with the number on the back of your card to find out if you’re eligible for a credit line increase. In some cases, card issuers may also increase your credit limit automatically without a request on your part.
The bottom line
Having maxed-out credit limits can make your financial life harder. Not only can your credit score take a hit, but you may have purchases denied and you’ll see the minimum amount you owe each month increase until you get your balance paid down. It can also be a sign of deeper issues with your spending or general money management.
Avoid using your full credit limit by creating a monthly budget, tracking your spending and making multiple credit card payments each month.
FAQs
If your credit card has reached the end of its credit line, you’ll likely be denied at the point of sale when you try to make new purchases. Your minimum payment amount required each month will also increase, and your credit score could drop.
You can “fix” a maxed out credit card by paying your balance down. You can also call your card issuer to see if they’ll raise your credit limit and grant you more available credit.
Toping out your credit card can hurt your credit score and lead to you paying a lot more in credit card interest over time. Put simply, charging up to your card limit is bad for your finances.
If your credit card has hit its limit, you should focus on paying down debt. You can do this with a balance transfer credit card, a personal loan or the debt snowball or debt avalanche debt repayment methods.
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