Why maxing your cards can impact your credit score

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Ever since I began managing my own money, my parents always used to tell me I could use a credit card as much as I wanted as long as I could clear the balance every month. Never max out your credit card they used to say. Always leave space for emergencies.
That advice was sound and I’m still following it many decades later. It also had an unforeseen benefit. Maxing out your credit cards can also impact your credit score. Even if you’re paying it back on time every month, your ability to get an auto loan or any extra credit can be impacted as a result.
Maxing out your credit cards can:
Impact your affordability
Up to 30% of your credit score is calculated from affordability. That is made up of how much credit you are reasonably able to afford and how much of it you have used. If you’re running your credit card(s) at max, your affordability is going to be seriously impacted. This will have a knock-on effect on how much a lender might be willing to loan you for a new car.
Gives the wrong impression
Lenders are all about the algorithm but they also look at other factors such as habits and lifestyle. Maxing out credit cards is often seen as a sign of someone struggling with debt already. Credit cards are an expensive form of credit and most people use them for convenience and not as a cheap form of lending. While it may not be true, maxed out credit cards are often viewed as a warning sign and therefore seen negatively by lenders.
Compound interest
Credit card interest is calculated monthly. Making the minimum payment on a maxed out credit card isn’t going to reduce that debt all that much. Depending on your credit card and the interest rate, it may not go down at all. Unless you can afford to make larger payments, the debt increases, not decreases. If you’re already at your credit limit, this could impact your score in a big way.
Penalty rate risk
If you miss a payment or go over your credit limit, some credit card companies use a penalty rate. This is generally the highest rate of interest they can charge and they often will charge this. If you’re paying a middling interest rate and suddenly end up paying an extras 10-15%, this could cause debt to spiral out of control. This will definitely impact your credit score!
I am not telling you how to live or how to manage your credit cards. I am are merely illustrating how certain lifestyle choices can impact other areas of your life. Especially when it comes to finance and loans.
A car loan is a big thing. Even though millions of Canadians borrow every year for a new car, it is still a commitment and still involves thousands of dollars. To get the best deal on a loan, you need a good credit score. To get a good score, you need to manage your existing debt responsibly and show lenders you’re in complete control of your finances. A maxed out credit card is not how you do that!
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