Common Financial Mistakes: Maxing Out Credit Cards

Common Financial Mistakes: Maxing Out Credit Cards

When there's a $1,000 credit line to your name, it may be tempting to feel rich. It may even be tempting to spend some of that credit on a hot new outfit or a few other treats. But spending all of that would-be cash can cause you some major trouble in the form of lowered credit score and a strapped-for-cash situation. Want some more details? Let's look at some more info on credit below!

What is a Credit Card?

I'm sure most everyone knows what a credit card is, but do you know the details behind how credit cards work? Just in case, let's look at the generalities and specifics behind the inner-workings of credit cards.

Credit cards work based on your repayment ability, which is largely based on your credit history. That's why when you first start out trying to get your financial bearings credit card companies will give you a low credit limit (let's say $200).

As you continue on your financial journey, you must make payments to the credit card company. They'll send you a bill for a low dollar amount (let's say $10 per month). As long as you make these minimum payments every month, the credit card company will consider you a good customer, and they will eventually raise your credit limit.

So now you may have $1,000 of credit to your name. You can spend all of that money if you wish, as long as you pay the credit card company the minimum amount due each month. The kicker is that the minimum amount due won't make much of a dent in your total credit bill. Often, the minimum amount due only covers the interest amount on the credit, so even as you pay religiously on time every month, your bill will hang out at your $1,000 maximum credit – unless you make additional payments.

Why Maxing Out Your Credit Can Hurt You

Not only does it hurt you financially to make repeated payments to interest without making a dent in your balance, but maxing out your card can hurt your credit score and leave you with crushing debt. Let's look at each of these.

Your credit score is based on how well you handle your credit, but making the minimum payments on time all the time is only part of the totality of the credit score. Many other factors play a part, but let's just focus on the maxing out of credit cards.

When you spend all of the money available to you on a credit card, it looks bad to the credit score powers that be (called FICO). FICO takes a look at all of the credit you have available and at all of the credit you have spent. When the percentage of credit available to credit spent isn't within a range they like to see, they ding your score. So, for example, if you've spent $1,000 of your $1,000 credit limit, that throws up a huge red flag to FICO. Basically, it tells FICO that you might not be able to meet your repayments if anything negative were to happen in your life, like an emergency.

Speaking of not being able to make repayments if an emergency should arise, that could become an issue if you max out your credit cards. Eventually, the minimum payments due could become overpowering in your life, even in the best of situations. Throw in an emergency, and it could be nearly impossible to make your payments on all of your bills, which can put you and your family at risk for eviction, cut off water and electricity, and an inability to feed your family.

Credit cards aren't all doom and gloom. When used responsibly (say to buy gas every week when you pay off the balance each month), credit cards can give you some great perks. However, maxing out credit cards can hurt you, your family, and your credit. So before you swipe the card, make sure you understand the risks and benefits.

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Winfred Roger's picture

Winfred Roger wrote:

Wed, 07/18/2012 - 11:41 Comment #: 1

Ha, I have found these are very common mistakes which I am doing regularly. I believe my skill would be idea if I avoid these common mistakes. I amazed to read the excellent post. Thanks! :)

Learstiphen's picture

Learstiphen wrote:

Mon, 09/17/2012 - 08:37 Comment #: 2

What's an excellent post it is! At first I mistook the common wrong about credit card. But now I am clear reading the post. Credit cards aren't all gloom. Credit cards can give you some great benefits. I am much benefited reading the post. Thanks a lot.

Christa Palm's picture

Christa Palm wrote:

Mon, 09/17/2012 - 16:03 Comment #: 3

Roger, thanks and good luck with your new outlook on credit cards!

Lear, very true that credit cards can be beneficial when used responsibly.