Living on the Edge: Maxing Out Credit Cards

Hey there Money Saver! Welcome back to another week of How to Save A Buck, where we explore ways of saving money in personal finance, credit cards, and investing!

Ever heard Aerosmith’s song “Living on the Edge?” Well, some people take it quite literally when it comes to maxing out credit cards. In the world of plastic money, the edge seems alluring, but it's slippery!

According to the Federal Reserve Bank of New York, US credit card balances reached a fresh high of $1.08 trillion in the 3rd quarter of 2023. That's trillion with a 'T'! This is the largest increase since the Fed started tracking the data in 1999.

GULP.

In simple terms, maxing out credit cards refers to hitting the credit limit set by a card issuer. A host of reasons exist why people resort to this financial behavior. Some do it for rewards (air miles or cash back), while others use it for large but necessary purchases (rent, car expenses, etc). Others may consolidate debt or start a new small business venture.

Others do it to build credit history. "No risk, no reward," they say. But remember, great credit limits come with great responsibilities.

So, why is maxing out credit cards a bad idea? The money is already loaned out to me, right? Maxing out a credit card can have several negative effects on your financial health. It can lead to high-interest rates, late fees, and a decrease in your credit score. Plus, it can cause stress and anxiety, which can affect your overall well-being.

OK, so I maxed out my card for good reason. How can I recover and get back to zero?

1) Stop digging yourself into a hole!

Try to stop using your card and pay off the balance little by little. How can one do this? Some ideas include:

• Stash your card away in an out-of-sight drawer

• Leave your card at home when you go out

• Use your card’s lock feature (if available) to prevent future purchases

• Delete your credit card information from apps and websites

• Some people even turn to extreme measures like freezing a credit card in a block of ice

• consider using cash to pay for purchases

Hey - do whatever it takes to prevent any transactions while you pay down the entire balance.

2) Reevaluate your budget!

A maxed-out credit card may indicate that your budget needs to change. Examine your credit card statements, and consider whether the debt was within your control, or if unforeseeable factors like unemployment or an emergency contributed to it.

Once you know the answer, you’ll know where to make changes. It may require adjusting your budget to match a different salary or putting measures in place to avoid overspending. Track monthly expenses and trim unnecessary purchases. Start with basics, such as subscriptions you may rarely use.

3) Use a get-out-of-debt option.

If you feel you cannot contain the destruction, look at debt consolidation plans or balance transfers to a 0% credit card to limit the interest you pay. Debt consolidation involves taking out a loan to pay off all your debts, leaving you with one monthly payment. Balance transfer involves transferring your high-interest credit card balances to a card with a lower interest rate.

It’s not ideal but could work as a last-resort option. (Always read the fine print and understand the terms of these plans.)

While maxing out credit cards may feel like playing Monopoly, trust me, there is no 'Bank error in your favor' card.

By taking the steps outlined above, you can mitigate the effects of maxing out a credit card and save yourself money in the long run. This will help you achieve financial goals and control your finances.

A good approach may be treating your credit card like a high school crush. Approach with caution, handle with care, and remember – rejection can be painful!

Remember, don’t live on the edge with your credit. It's not about how much credit you have; it's about how you use it.

Save On,

Chris