You might already know that credit cards can be an important part of healthy, responsible financial habits. However, you may not realize you can use your credit cards too much. If you're regularly driving up your credit card balances, you might be in for a surprise when you see your credit score.
What is credit card utilization?
Your credit card utilization is the percentage you get when you divide your total credit card balances by your total credit card limits.
Keeping your balances low--generally speaking, less than about 30 percent of your limits--can help you avoid damaging your score.
Say the combined limit of your credit cards is $13,000 and you run up $5,000 in charges in a month. Your charges amount to 38 percent of your total limit, which is a bit more than what's generally recommended and may hurt your credit score.
It's not always that easy to keep your balances low, though, especially if you need to use your credit cards to pay for important bills.
When it comes to letting your balances run high,2015 Credit Karma and Qualtrics survey found that young people are especially vulnerable: Over half of young adults (54 percent) reported racking up debt on their credit cards that they couldn't pay off within a year.
To learn more, we took a look at the cities where young Americans (age 18 to 24) used their credit the most -- and where they used it the least.
Top 10 Cities Where Young People Used Their Credit The Most
There are plenty of important expenses that could cause you to run up your credit card balances. If you have bills to pay and your credit cards are the only option, then you just might be stuck.
Negative economic conditions could be driving higher balances in these 10 cities. Seven of the 10 are among the top 50 impoverished cities for example (only Jacksonville, Norfolk and Baltimore avoid that list).
Whatever the cause, using up to 68 percent of your credit limit (which is the average for young people in Detroit, which tops the list) will likely take a toll on your credit health.
Of the 100 U.S. cities we looked at, eight of the top 10 listed here are ranked 88th or worse in terms of credit scores for young people. Detroit, Cleveland, Memphis and Newark are the bottom four, with Detroit taking last place with an average credit score of just 500.
Top 10 Cities Where Young People Used Their Credit the Least
Here's the flip side: In these 10 cities, young people generally were much more successful at keeping their credit card balances low. It's worthwhile to point out that these credit utilization averages are still a bit high, though, as using more than 30 percent of your overall limit isn't typically recommended.
None of these 10 cities fall into the top 50 for poverty levels, and every city here is in the top 30 (among the cities we looked at) for highest credit scores for young people. Irvine (646), San Francisco (625) and Fremont (622) lead the way nationally.
This may imply that keeping your balances low goes along with other responsible credit card usage. We recently looked at which cities had young people who paid the most bills on time -- seven of the 10 cities in the top 10 for using their credit cards the least were also in the top 10 for making the most on-time payments.
Why Keeping Your Balances Low Helps Your Score
Running up your balances could send the wrong signal to lenders. Generally, lenders want to extend credit to borrowers who they perceive to be consistent and reliable, and letting your cards get close to maxing out might make them feel otherwise.
So why is this the case?
"Credit utilization is one of the most important factors for your credit score," says Ken Chaplin, senior vice president at TransUnion, one of the three major national credit reporting bureaus. "If you're utilizing the majority of your available credit, you can appear risky to lenders who may question your ability to pay back your (debt)."
Credit card utilization is also an important part of most credit scoring models, including VantageScore 3.0 and FICO.
How to Keep Your Balances at the Right Level
Worried about how your credit card utilization might affect your credit score? Here are a few things to keep in mind.
1. Lower balances are better, but you should still use your credit cards.
While it makes sense to keep your balances at a low level, you probably don't want to stop using your credit cards altogether. Keeping accounts open and active is important for your credit health, and if you stop using one of your cards entirely your lender might close that account. However, making sure you use your credit cards doesn't mean you have to carry a credit card balance from month to month.
2. You could ask for a credit limit increase.
If your current limit is cramping your spending, you could consider asking your lender for an increase. If you have a solid history of on-time payments, your lender might be willing to agree. Sometimes your lender's investigation will add a new hard inquiry to your report, which can put a small ding in your score, so you should keep that in mind.
3. Consider paying down your balance more than once a month.
If you're racking up high balances with regularity, try paying down your balance every couple of weeks. Your lender will typically only report to the credit bureaus once a month, so if you pay down your balances in the meantime, then you may avoid affecting your credit score.
Keeping your total credit card balances low (typically below 30 percent of your credit limits) can be a key part of building a healthy credit score. If important expenses are getting in the way of that goal, you might want to start thinking about other ways to protect your credit health.
*All credit score and report data are based on Credit Karma members between the ages of 18 and 24 who live in the 100 largest cities in the U.S. and got their credit report through Credit Karma in 2015.
In late November and early December 2015, Credit Karma, with research company Qualtrics, surveyed 1,051 Americans between the ages of 31 and 44 to understand the difficulties they faced managing credit in their 20s and how they recovered financially.
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