Home > Credit 101 > Why Maxing Out a Credit Card Hurts Your Credit

Comments 0 Comments

The term “credit limit” can seem a bit deceiving. If a credit card issuer gives you $1,000 to spend, why is it so bad to actually bump up against that limit?

It can be a bummer to see your credit scores drop because of high debt use, even if you can afford the bills, but it makes sense if you know a little about how credit scores work.

Show You’re Responsible

Your credit utilization rate is one of the most important determining factors of your credit score, because it’s a strong indicator of your financial behavior and how risky it is for lenders to take you on as a borrower.

Credit utilization is calculated by dividing your total outstanding credit card balances by your total available credit on those cards. Keeping your rate below 10% is the best thing you can do for your score in this category, but some experts also cite 30% as the threshold you should aim for.

With that $1,000 credit limit, you’re looking at an ideal balance of $100 or $300, and to get the most out of that limit, you’ll want to pay your balance each month, otherwise it will creep up over time and hurt your utilization ratio.

That may seem simple enough, but you may be wondering, “Why such a low percentage?”

Think about it: Having the ability to spend $1,000 but spending only $100 shows self-control. Lenders are less exposed to losing money when you spend responsibly.

When you filled out your credit card application, the issuer probably asked you to state your income, which is often factored into determining your credit limit upon approval. If you’re getting close to spending what the issuer has determined is the maximum you can afford, potential creditors understandably become concerned that you may be struggling to meet all your financial obligations, since credit allows you to spend now and pay later.

You can see how your credit card spending impacts your credit utilization by checking your scores with the free Credit.com Credit Report Card — it will show you your utilization rate and how it compares to the national average. If you need to improve your utilization, it helps to try and reduce your spending and check your Report Card every month to track your progress.

Work Within Your Limits

As far as budgets go, not everyone with high utilization needs to reduce their spending.

You can always try requesting a credit limit increase, and if that doesn’t work, you can try paying your credit card off multiple times a month instead of just paying off the statement balance to give you more spending room without compromising your utilization rate.

No matter what you can afford, it’s in your best interest to work toward high credit scores, because they will save you money on interest and other loan products.

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team