When you use the entire credit limit of your credit card, you are believed to have maxed out your credit card. And it is not recommended by financial advisors since this is likely to have adverse consequences.
For instance, a Delhi-based consultant Ravi Pratap, 31, has a credit card with maximum limit of ₹9 lakh. Three months ago, he happened to use the entire ₹9 lakh when he was on a foreign holiday with his wife. Now, he wants to raise a personal loan, but the interest rate that the bank is offering is exorbitant.
When he asked around to find the reason, he learnt that his credit score has lately suffered significantly as a result of maxing out of credit card. So, using it to its full capacity can have a slew of consequences.
These include the following:
High utilisation ratio: When you max out your credit card, you are using the entirety of your available credit limit. This leads to a high credit utilisation ratio, which is the amount of credit you’re using compared to your total available credit.
A high utilisation ratio can adversely impact your credit score because it suggests you may be overextended financially.
Higher interest payments: If you don’t pay off the balance in full by the due date, you’ll start accruing interest on the remaining balance. Credit card interest rates are usually high, so carrying a balance can lead to significant interest charges over time, making it more difficult to pay off the debt.
Late payment of fees: If you’re unable to pay at least the minimum payment by the due date, you will likely incur late payment fees. This can add to your overall debt and financial burden.
ALSO READ: These are 5 warning signs of credit score problems. Details here
Adverse impact on credit score: A high credit utilisation can negatively impact your credit score. Payment history is another significant factor in credit scoring models.
Procuring further loan: When you max out your credit card and have a low credit score, it can make it challenging to obtain additional credit when you need it. Banks may see you as a high-risk borrower and be less inclined to extend credit to you.
So, in order to spare these consequences, it is vital to use credit cards responsibly by only charging what you can afford to pay off in entirety every month.
Frequently Asked Questions:
How can you ask for raising of credit limit?
You may contact your credit card issuer and request for a credit limit increase. Many issuers allow you to request increases online or through their mobile apps.
Does your income impact the credit score?
Unlike the perception, your income is not directly proportional to your credit score.
Would checking the credit score often lead to decline in the score?
Although it is believed that checking your own credit score hurts the credit score but it is not true since checking amounts to a ‘soft inquiry’ which does not affect the score.
What are the tried and tested ways to raise your credit score?
You can improve your credit score by regularly paying bills and keeping credit card balances low, and avoiding to open too many new accounts.
What is the alternative when your credit card issuer refuses to raise your credit limit?
If your current card issuer is not willing to raise your credit limit, you may consider applying for a new credit card with a higher limit.
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Published: 01 Apr 2024, 11:40 AM IST