You were just approved for a new credit card. You have a $10,000 credit limit, but does that mean you should actually use that credit card for $10,000 worth of balance transfers, bill payments, and purchases?

In most cases, it isn’t a smart financial decision to use the full credit limit available to you. As you increase your debt to credit ratio, you demonstrate that you don’t know how to moderate your spending very well. Then when you apply for another card down the road, you could appear to be a bigger credit risk (after all, if you already have several credit cards with decent-sized limits, why would you really need more in the eyes of a new creditor?). That’s not even the primary issue though. There are more important considerations. You might even be surprised to hear that it could be okay to max out a credit card in some, very limited, circumstances. Let’s look at some:

Emergency Funds

The big issue with maxing out credit cards is that you shouldn’t max out the credit limits while making purchases. That $10,000 credit limit isn’t a license to buy $10,000 worth of electronics you want but don’t need. Remember, that money will ultimately still come out of your pay cheque, investments, or savings when you pay off the debt (with interest).

So what happens if you rack up $10,000 in debt, and then you’re injured and temporarily out of work without adequate insurance coverage to help you maintain your lifestyle?  If you had left a significant portion of your credit limit available instead of maxing it out, then you would have had a built in emergency fund to help you get through the rough patch (to be paid back a bit further down the road).

That’s a situation where it might be okay to max out your credit cards — out of true necessity, for a temporary period of time, and only if you know you’ll be back on your feet and earning enough to pay off the debt in a reasonable timeframe. Hopefully you can see the difference between that and simply spending the money for the sake of spending it.

Bill Payments and Rewards Points

If you have a relatively low credit limit (of maybe $2500 or $5000), you might max it out regularly by making routine bill payments. This is especially true if you’re using a rewards card, like the Woolworths Everyday Money Card.

In that case, it might actually make sense to go ahead and use your credit card to pay off all of your bills and make your everyday purchases like groceries and petrol, even if it puts you at or near your credit limit. You’ll earn your rewards points for purchases and payments you have to make anyway. The key of course is paying those charges off quickly (within the same statement period) so you don’t accrue any interest or keep your credit limit maxed out for long.

The real difference between situations where it might be okay to max out a credit card limit and those where it’s not is time. Will it be maxed out in the long term or only for a few days to a few weeks while you pay it back down? Even though it might not always be “wrong” to use most or all of your credit limit, keep in mind that it’s probably not the best option available. Also keep a very close eye on when your credit card company usually charges your monthly fees and interest so those don’t show up unexpectedly, pushing your account over its limit and costing you even more money in fees.