Never max out your credit card. Here’s why!

If you have an unsecured credit card or a secured card like the one we offer here at Refresh, you've got your hands on a great credit-building tool. However, if used incorrectly, any type of credit card can actually damage your credit score rather than increase it.

How do you make sure your credit card is working for you, and not against you?

The answer? Never max out your card! In fact, you really shouldn’t use too much of your available credit at all as this affects your credit usage percentage which accounts for almost a third of your credit score - 30% in fact!

Credit usage percentage is the total amount of credit you have to your name versus how much of it you have used. If you max out your credit cards, your credit usage percentage is at 100%. For the best impact on your credit score, bring your credit usage below 30-35%. For example, if you have a $500 unsecured credit card, and your balance is $400, your credit usage is 80%. To be below 30%, it means never carrying a balance over $150.

The only time a maxed out credit card doesn't hurt your credit is if you pay it off in full by the end of your statement period. Some people like to put all their bills onto their card, as well as any purchases throughout the month, and then pay the balance off each month, therefore a) not paying any interest b) not impacting their credit score and c) taking advantage of any points that their credit card offers. People who do this tend to be financially savvy and very diligent about paying their bills so as not to negatively impact their financial situation. They do not spend more than they can afford to pay off, and they do not forget to pay it off. It's best to pay off the bill as soon as it's incurred to avoid the possibility that your credit card company will report your balance information to the credit bureaus while all your available credit is in use.

For the average Canadian, paying off their balance in full at the end of every month is not possible, and that's where they can get into trouble with debt. As soon as you make purchases on your credit card that you cannot afford to pay off right away — especially if you're using over 30-35% of your available credit — you're risking your credit score.

If you absolutely must use all of your available credit — for example if you’re financially impacted by an emergency such as a job loss — your credit scores can recover, as long as you pay down the balance and stay on track with payments. Making on-time payments accounts for 35% of your credit score, so even with a maxed out card, you can still be positively influencing your score. 

Refresh Financial offers Canadians a secured card. With a secured card — that looks and acts just like a regular credit card — you pay a deposit equal to the amount of your limit. You still have to make on-time payments, and you still should not use more than 30-35% of your available limit, however, you can build your credit safely, without going into any debt!

Learn more about the secured card!