Credit Building Tips

Why Should You Stay Away From Borrowing Up to Your Credit Limit?

Shaun Connell
July 7, 2023

When you receive a new credit card, you'll also learn how much money the issuer is going to allow you use. This is known as your credit limit. However, borrowing up to your credit limit generally isn't advised.

Why is this the case? Shouldn't it be fine to use your full credit limit?

Solution icon When you borrow the full amount of your credit limit or more, it's known as maxing out your credit card. This isn't a good idea for a number of reasons, including the fact that it can negatively impact your credit score, increase your debt load, reduce your financial flexibility, and more.

Financial experts typically advise that you use no more than 30% of the credit extended to you. This can help you be a more attractive borrower to lenders, ensure that you have access to funds in the case of an emergency, and help you keep your debt load low.

Why Should You Stay Away From Borrowing Up to Your Credit Limit?

When you borrow the full amount of your available credit (or even exceed it,) it's known as "maxing out" your credit card.

When you max out your credit card, it means that you won't be able to make any further purchases with the card because you don't have any more available credit. That is unless you make some payments to reduce the account balance.

There are several reasons that you don't want to max out your cards (aka borrow up to your credit limit,) including the fact that it can:

  • Increase your credit utilization ratio, which can lower your credit score and make it difficult to borrow money
  • Potentially lead to fees and penalties if you exceed the credit limit
  • Leave you with high-interest charges if you don't pay the balance in full
  • Reduce your financial flexibility
  • Leave you with a high debt load

Let's take a closer look at each of these to help you understand the consequences of borrowing up to your credit limit.

Negative Impact on Your Credit Score

When you have a credit card, your credit limit is the amount of revolving credit you have access to at any given time. As you make purchases, your available credit will go down to ensure that you don't spend more than your credit limit.

person online shopping borrowing up to credit limit

The ratio displaying the relationship between your card balance and your credit limit is known as your credit utilization ratio. This is one of the significant factors that is taken into account when calculating your credit score.

Your credit utilization ratio is one of the major factors that impacts your credit score. The higher your balances are in relation to your credit limit, the higher your credit utilization ratio will be.

For example, if you have a $10,000 credit limit and a $2,000 balance, it means that your credit utilization ratio for that card is 20%. However, if you have an 8,000 balance on the same card, your credit utilization ratio is 80%.

  • Maxing out a credit card means that your credit utilization ratio for that card is 100%.
  • This can have a significant impact on your credit score, causing it to drop by as much as 45 points.

Increasing Your Total Debt

When you spend up to your credit limit, it means that you're increasing your total debt burden. Depending on your financial situation, the card limit, and many other factors, this might not necessarily be a problem for you.

  • If you rack up a higher balance than you're able to pay in full on your next due date, though, this can have all kinds of consequences.

Carrying debt long-term can have a lot of negative effects on a person-- both financially and personally.

man stressed because he borrowed up to his credit limit

Understanding the Long-Term Effects of Debt

Here are some of the long-term consequences of carrying debt over an extended period of time:

  • Interest costs: Credit cards often have some of the highest interest rates compared to other types of accounts, such as home loans or auto loans. If you're just making the minimum monthly payments, you can end up paying an incredible amount of interest.
  • Fees and other charges: Some cards come with an annual fee, while others might charge balance transfer fees or cash advance fees. If you end up missing payments because you can't manage the debt, you'll get hit with late fees, too.
  • Inability to borrow money: Lenders will look at your debt-to-income ratio when deciding whether or not to give you a loan or extend a line of credit. If you have too much debt compared to your income, you might not be approved.
  • Collection costs: If your debt ends up getting sent to collections, you'll get derogatory marks on your credit report, which have a severe long-term effect on your credit score.
  • Mental health effects: Too much debt doesn't just impact your finances. It can impact your mental health. Some potential effects include anxiety, stress, and depression.
  • Physical health effects: Stress and anxiety about debt can also take a toll on your physical health in the form of high blood pressure, ulcers, and even heart attacks.

Make You Less Likely to Qualify For a Loan

If you're planning on applying for a mortgage anytime soon, it's a good idea to keep your credit utilization ratio low. The same is true for any other type of loan or line of credit.

On top of raising your credit utilization ratio, maxing out your cards can give you a less favorable debt-to-income ratio. When lenders are deciding whether or not to extend a loan to you, they want to know that there is a high likelihood that you will pay back what you owe on schedule.

Beyond that, if borrowing up to your credit limit leaves you with dings in your credit score and marks on your credit report due to missed payments, this is going to have a negative impact on your approval chances.

Potential to Accrue High-Interest Charges

Credit cards often have high-interest rates. The average credit card rate as of July 2023 is 20.09% for existing accounts and 22.39% for new offers. Since 2010, the average interest rate for new offers has gone up by almost two percent.

The interest rate attached to your account will depend on a number of factors. The better your credit score was when you applied for the card, the lower the interest rate you can usually achieve.

Credit cards have higher interest rates than other forms of debt for a number of reasons, including the fact that this type of debt is unsecured (aka not backed up by collateral in the same way a home loan or auto loan is.)

  • Unless you pay off the full balance of your card every month, you're going to start racking up interest on top of your maxed-out card.

Reducing Your Financial Flexibility

If you max out your credit card, you're reducing your ability to cover unexpected expenses. For example, if you have a surprise medical emergency, car repair, or high utility bill, you won't have available credit waiting to help you take cover of the bill.

It's good to have some wiggle room when it comes to your finances. You never know when you'll need to replace your washing machine or have to get an electrical repair done, for instance.

Keeping your balance low can help you have peace of mind, too, as you know that you will be able to pay for unexpected costs if they crop up.

Potential For Fees and Penalties

If you borrow up to your credit limit and aren't able to keep up with the payments, you could face additional fees and penalties.

  • Depending on how your minimum monthly payment is calculated, the amount that you're expected to pay each month could go up significantly if you all of a sudden max out your card.

If you can't afford to pay your bills and miss payments, this can lead to late fees, high penalty APRs, and potentially even having your account sent to collections if you don't pay up.

How Much Of Your Available Credit Should You Use?

The general rule of thumb is that you want to keep your credit utilization ratio under 30%.

  • This means that if you have a $10,000 credit limit, you should borrow no more than $3,000.
  • If you have a $1,000 credit limit, this means borrowing no more than $300.

Keeping your credit utilization low is recommended for a number of reasons, including:

  • Helping to keep your credit score healthy: Credit utilization is one of the significant factors in your score. When your ratio is lower, it suggests that you are able to manage credit responsibly.
  • Leaving room for unexpected expenses: Keeping your credit utilization low also means that you will have available funds if you face an unexpected expense or emergency. This gives you a bit of a safety net, which can be both financially useful and give you some peace of mind.
  • Demonstrating financial stability: When lenders see that your credit utilization rate is low, it helps them see that you're not experiencing financial distress and are using your credit wisely.
  • Making debt management easier: The last thing anyone wants is to get behind on their debt payments or feel buried in excessive debt. Keeping your utilization rate low helps ensure you won't get blown over by high minimum payments or spiraling debt.

Does a High Balance Impact My Credit If I Pay It Off In Full Every Month?

You might assume that paying off your balance in full every month should mean that how much you spend should have no impact on your credit score.

  • The truth is, though, that different card issuers will report to card agencies at different times of the month.
  • This means that your high balance could show up on your credit report and impact your score, even though you always pay it in full.

For this reason, it's important to really minimize credit card usage when you're planning on applying for a mortgage or otherwise trying to borrow money. Similarly, be careful not to rack up too high of a balance if your credit report will be pulled for an apartment application, job application, or for any other reason.

What Happens If You Go Over Your Credit Limit?

Sometimes, a credit card issuer will allow you to actually spend more than your credit limit. In some cases, you will specifically need to opt in for this feature. Other times they might give you a little wiggle room.

  • If you go over your credit limit, you might receive a text or email from your credit card company telling you that future transactions might be declined.

In some instances, going over your limit can mean that you face a penalty interest rate and an additional fee. Whether or not this is true in your situation has to do with the fine print of your card agreement.

You'll probably also see your credit score drop if you go over the limit, and this is reported to the credit reporting agencies. It's generally considered negative to exceed your credit limit, regardless of the specific amount or percentage that you went over the line.

Credit Limit FAQ

Before I sign off, let's take a look at some commonly asked questions about credit limits and credit card usage best practices.

Is It Possible to Have a Credit Limit That's Too High?

There are a number of advantages to having a higher credit limit. For example, it can:

  • Help reduce your credit utilization ratio
  • Help increase your credit score
  • Give you access to more funds
  • Give you the opportunity to earn more rewards if it's a rewards card

On the other hand, having a high credit limit isn't always all sunshine and roses. There are some potential downsides, some of which can be catastrophic.

Having a higher credit limit can:

  • Give you access to more money than you can afford to pay back, potentially leaving you further in debt
  • It does not help your credit utilization ratio or credit score at all if you spend proportionately more

If you're thinking about applying for a new credit card or requesting a credit increase, it's important to think carefully about your income and expenses. You never want to borrow more than you can afford to pay back in a reasonable amount of time.

Should I Request a Credit Limit Increase?

Whether or not you should request a credit limit increase will depend on a bunch of personal factors.

The best time to ask for an increase is when:

  • Your income has recently gone up
  • Your credit score has recently gone up
  • You have established yourself as a consumer that makes regular, on-time payments

A credit card issuer doesn't have to increase your credit limit. They might also only grant you an increase that is a percentage of what you requested.

Are you requesting a credit limit increase because you're already deep in debt? If so, you'll want to slow down and decide if this will really help you solve your problem. If your debt is the result of a spending problem or poor money management, you could just end up finding yourself with a higher debt load in a short amount of time.

Should I Request That My Credit Limit Is Lowered?

Requesting a lower credit limit usually isn't a good idea when it comes to your credit.

This is because it will likely increase your credit utilization ratio. For example, if you have a $5,000 balance on a $15,000 limit card, your credit utilization ratio is 30%. However, if the balance is lowered to $10,000, this means that your credit utilization is 50%.

That being said, keeping your credit score perfect isn't always the most important thing. Maybe you already have a mortgage and a car loan, and you're not planning on borrowing money anytime soon. If you're not worried about having a pristine credit score but more interested in reducing your access to available funds, you certainly could request a lower credit limit.

Reasons You Might Request a Lower Limit

Some of the reasons you might choose to request a lower limit include:

  • Reducing access to funds when you have a bad habit of overspending: Is it hard to resist the temptation to spend money when you have it? Reducing your credit limit can help make sure you don't take on more debt than you can handle. This can be a useful tool to help build more financial discipline.
  • Improving management of your debt: Do you have a lot of debt, and you can't bear the thought of taking on more? If so, you could find lowering your credit limit to be psychologically helpful.
  • Reducing the risk of identity theft or fraud: Most credit cards have pretty impressive fraud protection these days. However, individuals that are concerned about fraud might not want to have a higher credit limit than they need.
  • Reducing reliance on credit: Some people might actively work towards achieving the financial goal of reducing their reliance on credit. If that's the case, lowering their credit limit could be a signifier of getting closer to their goal.

You'll want to think about the pros and cons of requesting a reduction in your credit limit before making the call. Depending on whether you need your credit score to be in great shape in the near future, it may or may not be a good idea for you.

What Best Practices Should I Follow When Using a Credit Card?

Credit cards can be a high-risk, high-reward type of thing. When used correctly, they can help you build a healthy credit profile. Used irresponsibly, though, they can send you into spiraling debt.

Here are a few things to keep in mind when you're learning the best ways to use credit cards:

  • Always pay your bill on time to avoid fees, additional interest, and negative impacts on your credit score and report.
  • Always pay your balance off in full every month if it's possible.
  • Make a habit of reviewing your statement both for spending awareness and accuracy every month.
  • Keep your credit utilization ratio as low as possible. This is particularly important if you're planning on applying for a loan or a new card soon.

Your Credit Limit: The Bottom Line

It's best not to borrow up to your credit limit. When you max out your card, it can mean you're:

  • Taking on a lot of debt
  • Increasing your credit utilization ratio
  • Lowering your credit score
  • Leaving less financial wiggle room for yourself in the case of an emergency

It can be tempting to spend the money extended to you. The truth is, though, the last thing you want is to enter a cycle of unmanageable debt.

On top of that, it's important to recognize that a high balance can still impact your score even if you pay your balance in full every month. This is because it can be hard to know precisely when the credit card company will report to the credit bureaus.

Are you working to learn more about responsible credit use and improving your credit? If so, you're definitely in the right place! Here at Credit Building Tips, it's our mission to help people improve their financial literacy and gain access to more financial opportunities.

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Written By:
Shaun Connell
Shaun Connell is a personal finance and credit expert with a passion for helping individuals eliminate debt and improve their credit. He's enjoyed writing investing and financial content for over 15 years, with expertise in real estate, debt, banking, credit, and wealth building. His work has been seen by millions on the web.

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