What I Learned From Maxing out My Credit Card
On your journey to build solid credit, avoid making the same mistakes I did.
I never really wanted to get a credit card because I knew what I would do with it. It’s tempting to have a card in your hand for which you think, “think” being the key word here, the money doesn’t need to be paid back immediately.
Since I didn’t want a card, I didn’t get one until I was 24 and entering grad school. I knew having one would help me establish a credit score (which would eventually help me get a good apartment out here in Los Angeles). I did well for so long! I didn't use my credit card for any big purchases, mainly just small ones that I could pay off immediately. But then, I ran into an emergency.
Everyone Makes Mistakes…Right?
In summer of 2019, my summer stipend ran out before I could pay for my August rent. I know, I know, I should have done a better job of budgeting and monitoring my spending so that this wouldn’t happen. I get it. However, instead of asking my parents for help paying rent, I did the “adult thing” and transferred money from my credit card to my checking account so I could pay for my rent.
Yes, you read that correctly.
Little did I know, a cash advance is about the absolute worst thing to do when trying to build good credit. I thought that when I got my fall school funding in late August I would just pay off my credit card. But of course, that never happened because I had to pay for books, necessities, and rent for the rest of the year. My decision to not pay off this credit card immediately, while continuously charging small purchases to it, eventually caught up to me and I ended up maxing out my credit card.
My brother, who has great credit (he also happens to own this website), texted me after reading this post and said it made him irate.
Lesson Learned
When you transfer money from your credit card to your checking account, you incur a fee. This is known as a cash advance. Never. Do. A. Cash. Advance. A cash advance is a short term loan that typically carries a high interest rate and charges borrowers a fee. They do not directly impact your score, but, it will impact your outstanding credit and credit card utilization rate.
In other words, it impacts your credit score.
I didn’t know all of this because having a credit card was new to me. I did make one good decision though! Fortunately, I never stopped making my minimum payments on my credit card. In doing so, my credit balance had gone down little by little. If you do happen to max out your credit card, make sure to at least make your minimum payments because just doing that ended up raising my credit score.
Getting Back on Track
Eventually, I did end up paying off my credit card but, only because I was lucky enough to get a big deposit from an external scholarship. However, I didn’t pay it off until about 6 months after maxing it out. In the meantime, my interest rate kept increasing. Even while I was making payments on my card and not using it, I was still charged an interest fee every month. This could have all been avoided if I’d had sufficient emergency savings.
Had I set up an emergency savings fund, I would have never maxed out my card. In my time of need, I would have instead used my savings to pay my rent instead of taking out a cash advance.
Ever since the Summer of 2019, I’ve been committed to improving my finances. I’ve built up my savings, only making big purchases when I actually have money in my checking account. For now, my credit card will just be used for recurring expenses, like Netflix, so I can easily make payments and continue to increase my credit score.
Ultimately, there’s two lessons from my story:
Don’t max out your credit card
Build up an emergency savings fund
Don’t be like me! Always make sure you have enough money to cover your necessities.
