Advice | Maxed out on your credit card? Here’s how to dig out. (2024)

People miss payments for any number of reasons — forgetfulness, cash flow issues, or a loss of income — but one factor that is strongly correlated with future delinquencies is a high credit utilization rate, the New York Fed said. This speaks to the percentage of available credit tied up in outstanding balances, according to Experian. The amounts owed represent 30 percent of your credit score.

The widely known FICO scale runs from 300 to 850, and the score affects a person’s borrowing costs, insurance rates and, in some cases, ability to land a job. The concern is that borrowers using a lot of their available credit could become overwhelmed and begin to default.

Borrowers who were current on all their cards in the first quarter of 2024 had a median utilization rate of 13 percent in the previous quarter. But those who became newly delinquent had a median rate of 90 percent, which the New York Fed refers to as being maxed out.

“This makes sense, since using practically all of your available credit could indicate a tight cash-flow situation,” the New York Fed wrote.

Generation Z, those born from 1995 to 2011, were reported to have maxed out at 15.3 percent compared with 12.1 percent for millennials, 9.6 percent for Gen X, and 4.8 percent for baby boomers.

If you’re maxed out and struggling with your debt, you might be asking some of the following questions.

There are two popular strategies for paying off debt.

One method, called a “debt avalanche,” involves organizing such bills from the highest interest rate to the lowest. You then concentrate on paying the most expensive debt first while making minimum payments on the other cards. Then you work your way down the list.

The second strategy has various names, but I’ve dubbed it the “debt-dash.”

With this format, you list all your debts, starting with the one with the lowest balance. Take any extra money you can find in your budget and apply it to that first one while making the minimum payments on the rest of your cards or all other debts. Once you’ve knocked off the top debt, take all that money and now go after the next one on your list, and so on. If two debts are about the same amount, the one with the higher interest rate gets priority.

In my work, debtors who tackle smaller debts often become extremely motivated when they see tangible progress, and speed up paying off the rest of their obligations. This results in less interest paid overall.

If you’re having trouble managing credit card debt, get help from a nonprofit credit counseling agency through the National Foundation for Credit Counseling (nfcc.org).

Steer clear of debt settlement companies promising a quick fix to your financial misery. Don’t sign a contract that obligates you to pay thousands of dollars to help settle your debt. That money could be used to pay down your credit cards.

If your credit history is good, transferring your balances to a card with a zero percent promotion rate can help you tackle the debt.

I’m not a fan of using debt to pay debt, but this can speed up a debt reduction.

But be careful: Balance transfer offers have relatively short lives. Many offers right now range from 15 to 21 months. After the promotional period, you may face a higher interest rate if you haven’t paid off the balance.

If you don’t qualify for one of these offers, call your lender and see if you can negotiate a lower rate.

Don’t tap your 401(k) or similar workplace retirement account to pay off credit card debt.

Let that money stay invested.

As of May 16, the average interest rate on a home-equity loan was 8.66 percent, according to Bankrate.com. The average HELOC interest rate was 9.17 percent.

Currently, the average credit card interest rate is 24.71 percent, according to LendingTree.

It may appear to be a better option to trade higher interest credit card debt for a lower cost home equity loan or line of credit.

However, in my experience, with zero balances on their credit cards, many borrowers end up amassing debt again.

Also, keep this in mind. You’re not “paying off” your credit cards. You’re just swapping one debt for another.

Maxing out your credit limit for any one card or across several cards can negatively affect your credit score.

“It should be noted that credit card utilization is a function of both balance and credit limit, and people with lower limits generally have higher utilization rates,” the New York Fed said.

Younger borrowers are more likely to have lower credit limits, which can result in a higher use of their available balance.

Gen Z borrowers have a median limit of $4,500, Fed data show. That compares with $16,300 for millennials, $21,800 for Gen X and $22,000 for baby boomers.

You’ve probably heard that you should have a credit card utilization rate of no more than 30 percent. For example, if your credit card limit is $4,000, it’s better for your score to keep your revolving balance to $1,200 or less.

Though 30 percent isn’t a hard-and-fast rule, it’s a benchmark that can signal financial trouble ahead. And a good place to hit the brakes.