Maxing out a credit card is bad news. Read on to see why this writer almost did so accidentally.
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One of the worst parts of being a homeowner is having to cover the cost of sudden repairs — especially when those repairs are major ones. Such was the case for me a few months back, when a heating maintenance appointment revealed that my system was not going to last through the winter.
I live in the Northeast, so going without heat is not an option. And after shopping around, my husband and I found a company to replace our heater at a cost of $12,000.
Thankfully, we had money in our emergency fund to cover that expense. But we opted to charge it on a credit card and pay the bill in full immediately to get the reward points.
Sometimes, when you put an expense like that on a credit card, you’ll face an extra charge for that convenience. But the company we used didn’t impose a surcharge for paying by credit card, so doing so made sense. That way, we at least got some cash back to offset the cost of the repair.
But because I don’t normally spend $12,000 on top of my usual monthly expenses, I almost wound up maxing out my credit card. And that would’ve had really negative consequences.
When you send your credit score plummeting
Maxing out a credit card is bad news for a few reasons. First, when you go this route, you use up all of your available credit so you don’t have room to charge an emergency expense. But also, maxing out a credit card could cause serious damage to your credit score if it’s your only card.
FICO says that someone with a strong credit score of 793 could see their score drop to as low as 665 if they max out their credit cards. And even if you’re only maxing out one card of several, it could drive your credit utilization ratio into unfavorable territory, bringing your credit score down in the process.
How I avoided a problem
Thankfully, my husband and I realized that charging a $12,000 expense would be an issue from a credit limit perspective, so we called our credit card company and asked to raise our credit limit. The company had no problem doing so, and as such, we were able to charge our new heating system without a problem. We then dipped into our emergency savings to pay off our credit card balance in full, so we didn’t have to pay any interest on it.
Of course, going forward, we’ll need to be careful to not abuse that higher credit limit. But because we have a long history of paying our credit card bills in full, we aren’t particularly worried about having a higher limit.
If you’re facing a big expense you expect to charge on a credit card, it’s a good idea to ask for a credit limit increase. Even if your existing credit limit allows you to charge that expense without going over, you don’t want to raise your credit utilization ratio too much. Getting a credit limit increase could help you avoid a hit to your credit score when unusually large expenses arise.
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