Credit cards can be a tremendous financial tool, but only when used responsibly.
Unfortunately, many people push the limits on their credit cards and trap themselves in a cycle of debt. A recent study by the New York Fed revealed that despite overall household debt having grown moderately, credit card delinquencies have surpassed pre-pandemic levels.
Below, we’ll explore what it means to get “maxed out” on your credit cards and what you can do if you find yourself in this situation.
What Does It Mean to Be Maxed Out?
You max out a credit card when you use up the entire available limit (or credit limit) on your card. For example, if you have a credit card with a $5,000 limit and spend all $5,000, your credit card is maxed out.
In the study mentioned above, the Fed considered maxed-out consumers to be those who used at least 90% or more of their credit limit. It found that in the first quarter of 2024, 18% of those using credit cards are using at least 90% of their available credit.
Credit Card Delinquency Rates 2022-2024
Who Is the Most Maxed Out?
According to the Fed study, young credit card users and those from low-income areas are the most vulnerable to maxing out their cards. Nearly one in five cardholders who meet these demographics use at least 90% of their credit limit.
They have a median total credit limit of $5,000, a lower rate than borrowers with lower utilization rates. While these individuals max out their credit cards for several reasons, the rising cost of living and higher cost of borrowing are definitely culprits.
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Credit Card Delinquency & Changes in Credit Card Utilization Rates
The Fed’s study shows that the rise in delinquency is most prominent among borrowers who have maxed out their credit cards. This group is facing higher delinquency rates than before the pandemic.
According to Joseph Camberato, CEO at National Business Capital.com and Forbes Finance Council Member, the relationship between these higher credit utilization rates and credit card delinquency is no surprise.
Higher usage rates mean more available credit is being used, straining finances and increasing the risk of late payments.
“When you’re using a lot of your available credit, it’s easy to see how things can start to slip. If your balance is high, your minimum payments will also be higher, and you’re paying more in interest, too. It doesn’t take much for that to become overwhelming, especially if your income takes a hit or your expenses go up,” says Camberato.
“On the other hand, if you’re only using a small part of your available credit, you’ve got more wiggle room. You’re less likely to miss a payment because your financial situation isn’t as tight. Having that extra space makes it easier to stay on top of your payments, which helps you avoid falling behind,” he adds.
Solutions for Being Maxed Out and Late on Credit Cards Payments
If you’re maxed out or late on your cards and at risk for delinquency or already there, don’t panic. There are ways to improve your finances and overcome this difficult situation. Here are some options to consider.
Debt Consolidation
When you consolidate your debt, you roll all your debts into a single personal loan with one manageable monthly payment.
Ideally, you’d be able to land a lower interest rate than the rates you’re paying on your current debts. Debt consolidation can be worthwhile if you’re struggling to make all your payments and want to simplify the debt payoff process.
You’ll only have one payment and due date to keep track of. Keep in mind that you’ll likely need good credit to get the best interest rates.
Debt Management
Debt management is a catch-all term that refers to everything you or a company do to reduce the balances on your credit card accounts, loans, and other types of debts.
You may negotiate with your credit card issuer for a reduced interest rate, consolidate your loans, or create a budget. One popular debt management solution is a debt management plan or DMP.
With a DMP, you work with a credit counselor from a non-profit agency to develop a game plan for reducing your debts. The counselor may contact creditors on your behalf to negotiate for lower payments or a reduced balance. They’ll also distribute the payments to your creditors once you send them an agreed-upon monthly payment.
Debt Snowball and Debt Avalanche
The two most popular DIY debt relief solutions are the debt snowball and debt avalanche.
If you’d like to save as much as possible on interest over time, the debt avalanche strategy may be the way to go. It prioritizes paying off your debts with the highest interest rates first.
The debt snowball might be a better fit if you need some motivation and want to build momentum as you pay off debt.
With the debt snowball strategy, you repay your smallest debt first, then apply the payments you previously used toward it to pay the next smallest debt.
Extreme Budgeting
With a budget, you’ll find it easier to ensure you have the funds to cover your expenses and, as a result, lower your chances of overspending on your credit card.
“The first thing to do is take a hard look at your finances. Figure out where your money is going and start cutting back on any unnecessary expenses. It’s crucial to budget and live within your means, especially when dealing with debt,” says Camberato.
Extreme budgeting, where you only buy what you need and nothing extra, can make sense if you’re serious about becoming debt-free and would like to expedite the repayment process.
Balance Transfer
If you can get approved for a balance transfer credit card with a 0% APR for an introductory period, you can transfer all your existing credit card debt to it.
With this strategy, your goal will be to pay off your debt before the intro period ends, usually within 12 or 18 months.
A balance transfer card may be an effective strategy if you have good credit and want to save hundreds or even thousands on interest charges. Plus, you may be able to get cash back, travel points, or other credit card rewards.
You should compare debt consolidation loans with balance transfer accounts to determine which is best for your situation.
Credit Card Company Support
Some credit card issuers will understand and help you work through your situation, especially if you’ve been a loyal customer.
“If you’re worried about missing payments, reach out to your credit card company right away. The company might be able to help with repayment options or direct you to resources that can assist. The sooner you talk to someone at the company, the better,” explains Camberato.
Bankruptcy
Bankruptcy is a legal process that may be a good choice if you face overwhelming debt. There are two types of personal bankruptcies, including:
- Chapter 7 bankruptcy: If you have limited income and cannot pay back at least some of your debts, you might be a candidate for Chapter 7 bankruptcy. Also known as liquidation bankruptcy, Chapter 7 requires you to sell most or all of your non-exempt property, sometimes including your house, to repay unsecured debts, such as credit card debt and medical bills.
- Chapter 13 bankruptcy: You may file for Chapter 13 bankruptcy instead of Chapter 7 if you have a higher income. Often referred to as wage earners bankruptcy, Chapter 13 involves a three to five-year repayment plan where you’ll repay all or a part of your debts. The bankruptcy court will discharge your remaining unsecured debts once the repayment plan ends.
Financial Solution Professionals
If you feel lost and would like some professional guidance tailored to your situation, don’t hesitate to reach out to a financial advisor or related professional. Sometimes, a little handholding is what you need to take control of your finances and make better spending decisions going forward.
While being maxed out and late on your credit card payments can be overwhelming, it’s not the end of the world. Several debt-relief solutions can help you overcome this roadblock and move toward a financially secure future.
