We all know that getting into credit card debt is a bad idea. Most cards charge double-digit interest rates, so carrying a balance from month to month can get seriously expensive.
But credit card debt can also do damage to your credit score, and maxing out a card — that is, charging up to your credit limit — is particularly harmful. This is because 30% of your credit score is heavily influenced by your credit utilization ratio. If you're using more than 30% of a card's available credit at any time, your score could be getting dinged.
Given all this, it might surprise you to learn that there are four situations in which maxing out a credit card could make sense. Be sure to read the information below carefully — there's a lot of nuance to each scenario!
1. You're in a serious emergency
If your health or safety is at risk, your credit score shouldn't be a top concern. When maxing out your credit card is the only way out of a serious emergency, don't hesitate to reach for plastic.
This reason for charging up your card shouldn't be taken lightly; it might be smart to first establish just what constitutes a serious emergency. For instance, your car breaking down on a busy highway probably qualifies, but wanting to take a last-minute vacation with friends likely doesn't. Setting up these parameters will help you avoid making a mistake that could seriously hurt your credit.
2. You're racking up rewards, and will pay it off right away
If you're using the right credit card, you're earning stellar rewards every time you swipe. To leverage this, some shoppers max out their credit cards on large purchases, then pay off the charges at the end of the month. This way, they're racking up points or miles without going into debt.
While this can be an acceptable reason to max out your card, don't wait until your billing cycle closes to pay off your big spend — do it as soon as the charge posts to your account. In doing so, you're minimizing the possibility that your credit card company will report
your balance information to the credit bureaus while all your available credit is in use.
3. You're unemployed and running low on cash
A long stretch of unemployment can be stressful, especially when your emergency fund starts to run dry. In this case, it might be time to start using your credit card for necessities, like food and gasoline.
It's somewhat of a judgment call, but if there's no job on the horizon, holding onto some of your cash reserves is probably a smart idea. There are some disasters (like emergency home repairs) that you might not be able to use a credit card to fix. This is why it might be a good move to use plastic when you can and thus keep at least a little cash on hand. It's not ideal, but holding on to some degree of financial security is more important than your credit score.
4. You're consolidating debt with a 0% deal
Carrying balances on multiple credit cards is a hassle, and you're probably paying through the nose in interest. If consolidating several debts onto one card that's running a 0% promotion is an option, it's probably worth looking into — even if it means maxing out the new card.
This is a lesser-of-two-evils situation. On the one hand, maxing out a card could hurt your credit score. But on the other, you'll save a lot of money on interest if you pay off the balance before the interest-free period is up. Plus, you'll be eliminating the balances on several cards as part of the consolidation process, which could give your credit score a modest bump. All things considered, it's probably best to opt for the consolidation.
A final word of advice. While you might have a legitimate reason to max out your credit card, paying it off should be a big priority. Make a plan to get to debt-free. and follow it to the letter. You'll be back to a zero balance in no time flat!
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