If You’ve Hit Your Credit Card’s Limit, Here’s What to Do Next

Your credit limit isn’t a guideline or a suggestion. It’s an absolute amount that you shouldn’t exceed. In fact, you shouldn’t be anywhere close to that amount.

But what if you are bumping up against your credit limit? This is a state of affairs that’s commonly called having a “maxed-out credit card.”

A maxed-out credit card is when you’ve reached – or even tried to exceed – your credit limit. An example explains this pretty quickly.

Let’s say you have a $3,000 credit limit on your credit card, and your balance is $3,000. That’s maxing out your credit card. If you aren’t careful and miss a payment, your finance charges could push your balance beyond $3,000, which also creates new headaches, like fees. So, at the very least, make your minimum payment and make it on time.

Listen, gazing at the balance of your maxed-out credit card for the first time can be a terrible shock. I know because I’ve experienced that moment. It isn’t pretty.

But I survived it and got out of debt. And with persistence and a debt-reduction plan, you can, too.

Aside from having a terrible feeling in the pit of your stomach, the following scenarios could occur:

Basically, you have two problems right now. First, you have credit card debt, and that’s stressful. Second, there’s likely been damage to your credit score.

You want to be proactive so you can limit the damage. Here are your next steps:

It takes courage to stare down your debt and admit that you’re in credit trouble. Whether you’re in debt due to impulsive buys or as the result of a divorce, illness or unemployment, the steps back to financial freedom are similar.

This is also a good time to think about how you got into debt. If it’s a medical crisis, I feel for you. That one’s tough, but you still have to deal with the financial fallout. Call your card issuer and explain your situation. You might be able to get relief, such as skipping a monthly payment or getting a lower APR.

If you maxed out a credit card because you’re a shopaholic, then you need to look at why you’re overspending. Reckless spending often points to an emotional issue you need to address.

Whatever the reason, if you haven’t been monitoring your credit card account or tracking your expenses, then you’ve been using a credit card like it’s a free pass at Disney World. There’s a simple solution for this problem.

Even if you have low balances on other credit cards, don’t use them again until you’re out of debt. If you’re using your credit cards to survive month to month, then consider talking to a credit counselor. Start your search with the National Foundation for Credit Counseling. Act now before it gets worse.

Oddly, you might have the urge to get a new credit card during the early stages of paying off the balance. Resist the impulse to get a new credit card with a shiny new credit limit. The hard inquiry on your credit will take points off your credit score, but more importantly, you might overspend with a new card.

You can’t hit a moving target, so don’t add to your debt. Are you with me? OK, now it’s time to make sure you have the tools to pull this off.

There are some basics when it comes to managing your money, and I call this your “Financial Foundation.”

I call it this because, to me, it feels like the foundation of a house. You can’t build a house on a shaky foundation. In personal finance, a shaky foundation leads to all kinds of problems, including debt. A solid foundation involves having a budget, tracking your spending and paying all of your bills on time.

This isn’t as daunting as you might think. There are lots of free apps and personal finance websites to choose from. Pick one you feel comfortable with. Then, enter your budget numbers, and start monitoring where your money goes.

All right, now you’re on the move. Whether you have maxed out only one card or five, you have to pay more than the minimum payment on your credit card balance to make progress.

Decide what expenses in your life are needs versus wants. Needs include items such as rent payments and cellphone service. You probably have other expenses that are more of a want than a need.

Be as ruthless as you can. You’re going to take the money you save from the cuts and add it to the minimum payment of your target credit card.

If it helps, remember that this is a temporary situation. You’ll have the freedom to choose how you spend your money when you’re out of debt. When I cut expenses to pay off my debt, I gave up a ridiculously expensive health club membership and started working out at a local gym.

After I got out of debt, I actually stuck with the cheaper option. So, your budget cuts can be temporary, or you might learn that your priorities have changed when it comes to really living within your means.

And don’t take away everything you love. If you look forward to your latte, keep your latte. But you’re going to have to cut something else in the budget to pay for it.

If you still have an excellent credit score, a balance transfer credit card is a good option. You’ll get a 0% APR for a period of time, usually about 12 to 18 months.

This gives you a chance to pay off – or at least pay down – the balance during an interest-free period. The trick is to figure out what your monthly payment has to be so you have a zero balance before your new APR kicks in.

If your score isn’t high enough for a balance transfer credit card, then consider getting a debt consolidation loan or just choosing a debt-reduction strategy on your own.

If you decide you need to pay it down on your own, there are a few good options. If you’re dealing with only one card, then it’s easy. That’s what you focus on. But if it’s more than one card, then make a list with the following information: name of the card, the balance and the APR.

Do you get excited about saving money? Then consider the debt avalanche method. List the cards from the highest APR down to the lowest. The card at the top of the list is your target credit card. This way, you tackle the card that’s charging you the most interest.

On your target card, pay more than the minimum payment. Remember the money you saved from your budget cuts? Now’s the time to apply your budget savings to the monthly payment of your target credit card. On your other cards, just keep paying the monthly minimums.

If you’ll get more of a rush from paying off a card quickly, then choose the debt snowball method. On your list, rank your credit card balances from the smallest debt to the largest amount. You target the smallest one first and get a sense of accomplishment more quickly. Note that you’ll pay more interest this way.

When I got out of credit card debt, I combined the methods to create my own strategy: the debt blizzard. I paid off my smallest balance first (snowball) and then switched to paying off the card with the highest APR (avalanche). Best of both worlds.

Every month, as your balance gets smaller, your score will get higher. A bad credit score is just a temporary side effect of maxing out your credit card.

Here’s why: The FICO score factors in your utilization ratio in two ways. It includes the ratio across all of your cards, but it also looks at the ratio for each individual card.

So, if you have a maxed-out credit card, your utilization ratio shoots up. When your ratio goes above 30%, it usually decreases your score. But if you want to improve your score more quickly, keep your ratio under 10%.

You can keep track of your score by signing up for a free educational credit score from one of the major websites that offer this. Or even better, if your credit card issuer gives you a free credit score (and some of these are actual FICO scores), pay attention to the number.

But don’t waste time having angst over it. As long as you’re sticking to your debt-reduction plan, your score will look better every month.