When consumers sign up for credit cards, they understand the many responsibilities that come with owning that card, and what it means for their credit score. Often, when considering a borrower's viability, credit utilization rates are examined, and generally OK'd if they have low to mid rates that demonstrate proper usage. However, despite the strict adherence to best practices in credit, consumers may be led to max out a line for an emergency or other purchase of services or essentials. Low limits may also hinder spending and result in credit score hits, but in some consumers' cases, it's worth it.
When to max out, and what to know
USA Today laid out a couple scenarios in which it might be acceptable to max out a credit card. Emergencies are clear situations in which one may need to max out a credit card to pay for medical expenses, home or car repairs and costs of children. If you're running low on cash and are in between jobs, that's another scenario where maxing out a card could be advisable. One not-so-noted situation to max out in is if you're accumulating points and it may pay off sooner if you make large purchases.
While all these situations may be viewed as times when a card should or could be maxed out, it's centrally important to know the risks involved and the actions to take to prevent or undue damage. Such risks include:
- Damaging credit score: Credit utilization accounts for 30 percent of your score, and if your utilization is thrown too far out of whack, your credit score will show a pursuant drop.
- Triggering a penalty fee: Many credit agreements are couched with a statute that holds if the cardowner defaults on a payment because of maxing it out. This penalty fee allows the creditor to increase interest rates to their highest, often 30 percent.
- Impacting future credit availability: A pattern of maxing out is a dangerous habit to gather, and lenders will likely look at it later on, if you seek new lines of credit, with a wary eye. Getting too deep in maxing out may severely restrict credit available to you down the road.
So why max out, and what to do
Given all the penalties and pitfalls laid out above, one may ask why he or she should consider maxing out in the first place at all. Writing for Fox Business in response to a consumer who posed a question about maxing out, Barry Paperno of CreditCards.com said in the process of building credit throughout your life, maxing out may allow you to not only repair, but improve on credit.
"How could hurting your score further when it's already low not be counter-productive when trying to rebuild your credit and raise your score?" Paperno wrote. "The short answer is that sometimes it's best to take one or two steps back in the short run so you can go further in the long run, and that in credit rebuilding you're running a marathon and not simply around the block. The longer, and more factual, answer follows."
The maneuverability a consumer has in maxing out a card lies in the temporary damage it can do. While payment history leaves a multiyear mark on a credit score, credit utilization delivers only a temporary hit if something goes wrong. In that case, it's of the utmost importance for any consumer considering maxing out their card to pay the charges as soon as they are posted to the account, and not leave it to the last moment when the billing cycle ends and you're in debt.