Does Maxing Out A Credit Card Hurt Your Credit Score?
Credit cards are a big part of U.S. financial life. Depending on how you use them, they can hurt you or help you. We’ll explain credit cards and your credit score, utilization, and ways to improve your credit score.
Credit cards and credit scores
Overall, credit cards can help build and improve your credit score. For those new to the U.S. or young people with “thin” credit files, i.e., not enough credit history to have a credit score, credit cards can help build your score. Those who have filed for bankruptcy can use credit cards to rebuild their score.
Opening new credit cards drops your score temporarily because it adds a credit inquiry to your report. But overall, it helps your score because it lowers utilization and will give you an additional on-time payment (on-time payments make up the most significant portion of your credit score at 35%) when you pay the bill on time.
Having too many credit cards can be bad if you have so many you forget to pay or if you are carrying high balances.
What does utilization mean?
Utilization is how much outstanding credit you have compared to the total amount of credit you have and makes up 30% of your credit score. For example, if you have two credit cards, each with a $500 limit, your total credit is $1,000. If you carry a balance of $200 on each card, your utilization is 40%.
In terms of your credit score, utilization under 30% is what potential lenders are looking for when checking your score when you apply for credit. But the lower your utilization, the better.
Maxing out a credit card (charging up to your credit limit) and paying it off immediately doesn’t hurt your utilization, as utilization represents your balance. You don't have a balance if you pay off your cards in full each month.
But maxing out your credit cards and not paying the balance in full will hurt your credit score and can devastate your financial life. The higher your balance, the higher your utilization. And when you carry a balance, you are being charged interest on that balance. Here’s an example of what that interest can do:
At the time of writing, the average interest rate on a credit card was 20.17%.
You have a balance of $1,000.
Your minimum monthly payment is $35.
It will take you 39 months, more than three years to pay the balance, providing you don’t add to it.
You will pay $347 in interest.
And a $1,000 balance is relatively small. The average American has $6,569 in credit card debt.
How much available credit is too much? The credit bureaus don’t consider “too much” available credit when it comes to your credit score, and the more available credit you have, the lower your utilization will be. As long as you are handling your credit responsibly, too much available credit won’t hurt you or your credit score.
Improve your credit score
One of the fastest ways to improve your credit score is to lower your utilization. You can do that by paying down your balances. One option is to get a debt consolidation loan. Provided your credit score is good enough to get a lower interest rate on the loan than you have on your credit cards, you can save a lot of money in interest over time.
Upwardli can help too! We have tools and resources that can help you start to build or improve your credit score today.
