Maxed-out credit card? Here’s what can happen and what to do

It can happen to anybody. For one reason or another, you reach the credit limit on your credit card. In other words, it’s maxed out. And that might mean there’s no credit available for purchases until you reduce your balance.

Maxing out a credit card can negatively affect your credit score and personal finances. That’s the not-so-great news. But if you make the right moves, you could lessen the impact of a maxed-out card.

What you’ll learn:

• A maxed-out credit card can lead to declined purchases, impact your credit scores and increase your monthly credit card payments. 

• You can deal with a maxed-out card by doing things like paying down the balance on your card and establishing a budget to help keep spending in check.

• It may be possible to pay off a maxed-out card more quickly by consolidating your debt or transferring the balance to a new card with a lower interest rate.

At first, it may seem like maxing out a credit card is merely an inconvenience. But a maxed-out card could create issues for your credit. Here’s a look at what may happen when you max out a credit card:

Some credit card issuers decline transactions when cardholders reach their credit limit, which can be frustrating. You may be able to continue using your card beyond your limit, but only if you’ve agreed to participate in your credit card issuer’s over-the-limit coverage program.

If your account has access, you can use Capital One’s Confirm Purchasing Power tool to check whether an overlimit purchase may be approved. You can also disable the ability to spend over your credit limit in your overlimit preferences.

While Capital One doesn’t charge fees for going over your credit limit, other credit card issuers may. If you’re not a Capital One customer, be sure to check with your card issuer to understand the terms of its over-the-limit coverage program before you opt in. View important rates and disclosures.

Maxing out your credit card can cause a high credit utilization ratio. This ratio is a percentage of how much credit you’re using versus your total available credit. The Consumer Financial Protection Bureau (CFPB) says to keep your credit utilization ratio below 30%.

Credit utilization can have a big impact on your credit scores. At FICO®, the amount of available credit you’re using makes up 30% of your credit score. At VantageScore®, credit utilization makes up 20% of your credit score.

Among other things, a low credit score could result in a credit or loan application being denied. It could also mean paying a higher interest rate on credit cards and loans.

The minimum payment is the smallest amount you’re required to pay on your credit card each billing cycle. Minimum payments are usually calculated based on your monthly balance. So if you max out a credit card, your balance will go up. That, in turn, will likely raise your minimum monthly payment. 

Keep in mind that if you make only the minimum payment each month, it can drag out the time it takes to pay off your balance. That’s especially true if you continue to use the card once you have available credit again. It also means you’ll wind up paying more in interest charges.

If you’re not able to pay your balance in full, making at least the minimum monthly payment on your credit card can help you avoid penalties and fees.

When you max out a credit card or exceed your credit limit, your credit card issuer might raise your interest rate for that card. This is commonly known as the penalty rate. The high interest rate can make your payments higher as well, which could further affect your finances.

Now that you’ve read about how a maxed-out credit card can affect your credit score and financial situation, you may wonder how to get things back on track. 

Here are five ways you can work toward lowering the balance on a maxed-out credit card:

If you’re unable to pay off your credit card balance in full every month, there are two popular methods for paying down debt that could help:

• Debt snowball method: This debt repayment strategy focuses on small victories when tackling your credit card debt. When you use this method, you’ll make at least the minimum payments on all your accounts. But you’ll focus on paying off your smallest debt first, followed by the next-smallest debt and so on until you’re debt free.

• Debt avalanche method: Using this method, you concentrate on paying off the highest-interest debt first while still making at least the minimum payments on your other accounts. When you’ve paid off that highest-interest debt, you put that money toward the debt with the next-highest interest rate.

Setting up a budget can help you stay on track with your spending. It also helps you identify areas where you can cut unnecessary expenses. Using a budget worksheet can be helpful in this situation.

If you feel stuck and not sure where to start, you might consider credit counseling. A nonprofit credit counselor could help you develop a budget and get a better handle on your debts. The Federal Trade Commission (FTC) offers several tips for choosing a trustworthy credit counselor. 

You might also consider the Capital One Money & Life Program. It’s not a credit counseling service, but the program can help you identify ways your goals in life connect to your finances. The program offers self-guided exercises, one-on-one mentoring and on-demand workshops to support your financial well-being. It’s free for everyone, whether you bank with Capital One or not.

You might want to look into debt consolidation through a balance transfer credit card or a loan. This allows you to combine debts into a single monthly payment. Ideally, the interest rate on the debt consolidation loan or balance transfer card would be lower than what you’ve been paying on the accounts you’re consolidating.

If you’ve maxed out a credit card, you may still be able to make some purchases with it. That could put you even further into debt. In this situation, it can help to stay aware of your card’s balance and track your expenses to avoid nonessential purchases.

Whether you’ve maxed out a card before or not, here are some tips you can follow to prevent maxing out a card in the future:

• Stick to a budget: Just as creating a budget can help you lower your debt, it can also help you stay out of it moving forward. Ideally, your budget should include paying off your credit card balances in full each month.

• Set a credit limit that works for you: If you’re able to pay your balance in full each month and have outgrown your credit limit, you could look into a credit limit increase or a new card. If you decide to request an increase, keep in mind that budgeting could help you keep track of your spending and help prevent maxed-out credit cards. On the other hand, if your credit limit is leading to overspending, consider setting your own limit in your budget—one that works for you.

• Build an emergency fund: As part of reevaluating your budget, you might consider establishing an emergency fund that covers your living expenses for at least three to six months. This money can be beneficial when you’re in a financial bind and you’re tempted to max out your credit cards.

• Set up account alerts: Your credit card issuer may have an option in your account preferences to set up alerts that will notify you if you’re approaching your credit limit. Setting up alerts may help you avoid maxing out your card.

Maxing out a credit card can also max out your emotions and finances. It can trigger declined transactions, hurt your credit score and increase your minimum monthly payments. But there are ways to get back on track. For example, you could do things like sticking to a budget and working to pay off your credit card balance in full every month.

If you’re worried about how a maxed-out card could impact your credit score, you may want to sign up for CreditWise from Capital One. With CreditWise, you can monitor your credit health for free without hurting your credit scores. And anybody can use CreditWise, so you can use it even if you’re not a Capital One cardholder. You can also get a free copy of your credit reports anytime at AnnualCreditReport.com.