Credit limits exist for a reason. A credit limit is the maximum amount you are supposed to charge or can charge without any form of penalty. The credit limit is determined by your credit history. This means that if your credit score is good, lenders are more willing to give you a higher credit limit because they trust you can clear all the payments on time. if your income is on the higher hand, chances are you will get a higher credit limit than most people. Even with a perfect credit history, a bank will not give you a higher limit if you earn minimum wage.
It is never a good idea to use the entire credit limit because it could cause much damage to your credit score. The damage leads to financial issues that can push you deeper into debt.
Here is why you should not max out that credit score
The credit score can drop
A large a part of the credit score (normally 30% ) will depend on how much available credit you have. It is the ratio of credit card balance to credit limit and is popularity known as credit utilization. High credit utilization means that you are close to the credit balances and credit limit and this will hurt your credit score. You can imagine how maxing out the credit can be bad for your score. The only way to recover is by clearing the balances.
Lenders do not like a maxed out credit card
Maxed out credit balances could lead you to losing a car loan, mortgage and any type of loan. When making an application for the loan, the bank always checks your credit to look at the points as well as the available credit on your card. If the balances are too high, the bank owners will think you have more debts and cannot handle to take any more.
You risk going over the credit limit
Even if you manage to keep the credit balances below the credit limit, you could end up over the credit limit once the finance charges are applied to the balance. When the balance goes over your credit limit, some additional penalties will be applied and this will be put even on the credit limit. Getting the credit limit down will be difficult especially for people who make minimum wage.
The balance is harder to repay
A maxed out credit cards can take you several years to repay depending on the credit limit imposed in the card. If you make minimum payments every month, it makes it harder for you to clear all the balances. Make larger payments to reduce the debt and be in good standing with your credit card points.
You could trigger the penalty rates
Credit card lenders and companies can increase the interest if you exceed the credit limits if it is in their terms and conditions. The penalty rate is normally the highest interest charged by the credit company. It could be up to 30% and more, which makes it harder for you to pay.