Awesome! The bank has approved you for a credit card beyond the limit you needed, so it’s shopping time, right? Not so fast. Maxing out those cards is not a good idea- and here is why.
In theory, you should accumulate cash on hand to deal with emergencies as they arise. Truthfully though, in practice that can be difficult to achieve on a consistent basis-especially when you are just starting out with managing your budget.
If an emergency arises, and you’ve already stretched to the limit on your cards- and you don’t have enough cash, what are you going to do?
Keep room on your cards as a back-up, back-up plan.
Credit is a Tool
View your credit as a tool, not as a means of income. This means living within your means- which means living within the budget you’ve set out for yourself.
If you’ve got enough room in your budget to cover the purchase at hand, then great- pay cash. If you don’t have the cast to cover it, then you don’t have the credit to cover it either (even if it is “available”).
One criteria that lenders look at is how close to your credit limits you are, and for how long. By maxxing out your cards, you are effectively lowering your credit score and hampering your chance for getting credit in the future when you really need it (i.e. what if you want to buy a house?).
Credit is Sneaky
It happens easily- charge an extra $20 here, $50 there. Sometimes without you even really knowing- and then all of a sudden you’ve painted yourself into a financial corner.
Know that the bigger the balance, the greater amount of interest you are going to owe. The greater the amount of interest, the more difficult it is going to be to erase.
Credit is a Business
Don’t forget that credit companies are in business to make money- off of your and other debt holder’s backs.
Extending your credit limit is not an altruistic move by your lender. It is a business move on their part- in hopes that you’ll carry a balance and pay them interest.