One of the dangers of using credit cards is that if you don’t keep on top of your balances, they can rapidly spin out of control. If you’re reaching the credit limit of one of your cards, it’s a clear sign to creditors that you’re having trouble managing your finances — and it should be a warning sign to you as well.
But if you take action fast, you can avoid any type of long-term damage to your credit. Even if you’re going through a financial rough patch, there are ways to organize your finances to keep out of further trouble.
Here are the most important things you must do when you’ve reached your credit limit so that you don’t damage your credit score.
Don’t Exceed Your Credit Limit
Approaching your credit limit can hurt your credit score. You should do all you can to lower your balance as fast as you can.
But your first step should be to avoid exceeding your credit limit. If you’re anywhere near your credit limit, be sure to pay off your charges as soon as you make them. While some creditors will simply deny any charges that put you over your credit limit, others may allow them, so be aware of where your credit limit is so that you don’t overcharge.
Something important to know is that while your credit card company may deny any over-limit charges you make, your interest charges may still push you over your limit. If you have a $9,900 balance on a card with a $10,000 limit, for example, your monthly interest charge is likely to be at least $165. That’s enough to push you over your limit even if you don’t make any additional charges. Depending on your card issuer, you may also be assessed an over-limit fee.
Stop Using Your Card, at Least Temporarily
As the expression goes, once you’re in a hole, the first thing you should do is stop digging. This is definitely true in the case of credit card balances.
While you’re going to have to do some work to get that balance down, if you keep putting charges on your card, things are only going to get worse. At least temporarily, pay for all of your purchases with cash. You may find that using cash in this manner will also help you manage your finances better and keep you from overspending, skills that can help keep you out of debt in the future.
Try To Reduce Your Balance to 30% of Your Limit
Your credit utilization is one of the most important components of your credit score. The higher your balance in relation to your limit, the more of a hit your score will take. Generally, creditors like to see credit utilization ratios of 30% or less. This means that if your credit limit is $10,000, you’ll want to always keep your balance below $3,000.
If you have the means, do what you can to pay down your balance to less than that 30% limit. If you have money in a savings account, for example, you might want to use a chunk of it to get your debt back down to a manageable level.
Another option is to find a new card with a 0% balance transfer offer, and offloading some of your debt to that card. While this doesn’t solve the problem of you having the debt in the first place, it can serve a dual purpose. First, it can reduce your credit utilization to less than 30%, which should help your credit score. Second, you’ll have something of a grace period to work with, as you’ll be paying 0% interest for a period of time on the balance you transfer.
Rework Your Budget
The hard truth is that if you’re anywhere near maxing out your credit cards, it means you’re overspending.
To keep yourself in financial balance, you’ll have to learn how to spend less than what you earn. Reworking your budget can help. If you write down your income and expenses, you can see in black and white where you are overspending and might have to make cuts.
Start by trimming your discretionary expenses, such as eating out or traveling. If you’ve reached your credit limit, you might have to eliminate those budget categories altogether until you pay off your debt. Be sure to include a line item for paying down your debt as well, if you don’t already have one. If you find that you can’t cover all your expenses based on what you earn, you’ll have to either get a higher-paying job or pick up a side gig to generate extra income.
More From GOBankingRates