YOUR SMART CREDIT

Most of people around you would think the answer is obvious one No. Getting into debt isn’t a good thing as creditors charge us a two-digit interest rates, hurting our precious credit score if we can’t handle it within a month. However, I believe that is only one perspective of problem, and we should max out credit cards sometimes, but sometimes not.

When will you max out credit cards?

This may surprise you that I got that thoughts. However, on top of all advices we must practice them into the particular scenarios with different factors. Therefore, you will see maxing out your credit card makes sense in these cases.

Paying for an emergency fund

That is true that all of us have to visit a doctor sometimes and if unfortunately this disease asks for special treatments along with a huge of medical bill, the credit issue will mean anything but zero to us.

In another situation, you lost your wallet in travel but your credit card is in the hotel. There is no good reason that you don’t use this card until your next flight home, even you max out all the limits.

We know using the credit limit as a whole is quite expensive, so taking a serious consideration what would be the top priority things will guide you to a right decision. These also proved a necessity of a personal emergency fund in advance as a financial support.

Running out of cash while unemployed

According to my own experience, the time gap is average 2 months between my two different jobs. However, paying bills while looking for a new job, which may encounter many rounds and stressful negotiation, leads the saving fund running dry quickly. In common words, we works for living, thus credit cards are your golden stars to buy you fundamentals like foods, electricity or gasoline.

Your credit score will be hurt as well but that’s still better than having no money in hands and buys you some time to deal with new job opportunities. Of course, when you step down into this level of financial security, it’s a must to get a new job, even a part-time one, to get out of trouble ASAP. That is truly a wakeup call for you.

Consolidating debts by a 0% APR credit card.

You must remember I mentioned 0% APR credit cards as a hero in debt management. But utilizing free-interest cards doesn’t mean you paid nothing since your opportunity cost is as much as your lost credit scores.

One more time, we have to validate the value of maxing out of 0% APR credit cards more than the first sight score. Firstly, we ain’t charged the high interest on top of the balance in a very limited period. Secondly, there is a chance to pay off all debts in this free period and get a new big fat credit score boost rewarded after this process. Whatever it could take, you still get higher benefits in overall.

Related story: How to avoid interest on credit cards?

What you should do after this?

Maxing out a credit card brings some bad impacts on your finance in most of cases. However, depending on your credit score, the above circumstances and income, you can take actions to reduce them as much as possible.

Paying down the balance

Keep in mind, the creditors will report your financial information monthly basis to 3 main credit bureau. Therefore, if you want to remain your current credit position on credit reports, you must pay the balance down. As we know the credit utilization rate weighed 30% of your credit score, I recommend, if possible, you reduce this rate to 30–10% of your credit limit. Of course, it depends a lot on the certain income and the possibility of borrowing money from other free sources like family or friends, but you and I can’t deny this is the most efficient solution so far.

Asking for the fee waving

Mostly the creditors will charge a penalty of up to USD 35 for exceeding credit limit. In a situation you need to save more, losing 35 bucks isn’t clever. You can obviously call to the creditors and ask for waiving the charge in your first time occurred.

Increasing a credit limit

Beside of paying the balance down above, you can achieve the 30% credit utilization rate by asking a higher credit limit after the situation. This tactic actually works out quite easily if you hold a good position on credit score and that is also the first request from you to them. But remember the lenders is going to ask a hard inquiry on your credit report for approval, that is considered as credit alarm to credit reporting companies for a future low credit score.

Utilizing all credit limit isn’t always bad because of the reason you decide to use it. But I believe it’s a wise move when we alway have to take it seriously based on certain parameters of emergency, and find a sustainable way out of debt after this. You also can find more tips on fixing credit scores here.

Originally published at yoursmartcredit.com on June 3, 2016.