For example, if your credit card limit Rs 3 lakh and your outstanding is Rs 3 lakh Credit Cardhas reached its maximum. Maintaining a low credit balance not only increases yourcredit score It also reduces the risk for lenders when considering your loan applications.
How is credit utilization ratio calculated and why is it important?
Credit utilization ratio is calculated by dividing the overdue balance on your credit card by the total available limit.
This ratio is an important factor in your credit profile. A low credit utilization ratio is favorable, while a high ratio indicates difficulty in managing expenses. It is recommended to keep the credit utilization ratio below 30%, especially if you are completely dependent on credit cards. It is advisable to avoid maxing out your credit limit for a better financial position.
A low credit utilization ratio positively impacts your credit score, which is the second most important factor after your payment history.
Reasons to avoid maxing out your credit card
Maxing out your credit card can have serious consequences, including hefty fines and a damaged credit score. Here are some common situations you should anticipate if you have a maxed-out credit card:
- a punishment: Maxing out your credit card increases your chances of missing a payment, which leads to interest charges. Additionally, exceeding your credit limit carries a penalty known as an over-limit fee, which typically ranges from 2% to 3% of the over-limit amount.
- Debt Cycle Trap: Expiring your credit limit means a larger amount to repay. Even if you convert transactions into EMIs, managing the total amount can be challenging, especially if you have other credit card bills and loan EMIs. This situation increases the risk of missing payments, which starts the debt cycle.
- Impact on Credit History: Maximum credit card usage has a negative impact on your credit history. When applying for another credit card in the future, even with a good credit score and high income, the bank may reject your application because of your max-out history.
- Drop in credit score: Maxing-out credit cards increases the credit utilization ratio, resulting in a lower credit score. A low credit score makes it difficult to secure new loans or credit cards, and even if approved, challenging to negotiate favorable interest rates.
- Benefits of lost card: A maxed-out credit card loses its primary purpose – to provide access to credit when needed. Instead, it becomes a burden as you find yourself paying the bills without enjoying any benefits.
What to do if you’ve maxed out your credit card?
If you find yourself close to maxing out your credit card, your credit score is likely in jeopardy. To reduce this, focus on reducing your credit utilization ratio in the following ways:
- Increase your credit limit: Request a credit limit increase from your bank, or consider applying for a new credit card. Be careful, however, because having a maxed-out card makes you appear as a risky borrower, potentially hindering approval.
- Pay the balance promptly: Clear your credit card balance as quickly as possible, ideally in full. This not only improves your credit utilization ratio but also demonstrates responsible financial behavior. The increased loan repayment may also respond positively to the limit increase request.
Remember, it takes time to see improvements in your credit score, usually 2 to 3 months. When dealing with extreme credit card consequences, actively work toward restoring financial stability.
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