In the aftermath of the Great Recession, Americans have changed how they use credit cards. According to a new report by the credit bureau Experian, the average person has fewer cards and lower credit card debt than they did a year ago.
But some of those changes are backfiring, the report shows. As Americans reduce the number of cards they carry, they are charging more on the cards that remain in their wallets. That is causing many people to use more of their available credit, which could have a negative impact on their credit scores.
“By carrying over credit card balances and utilizing a significant portion of their available balance, they can potentially negatively affect their credit scores, which can in turn, hurt them when it comes to applying for other types of credit down the line including mortgages and car loans,” according to an Experian press release.
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The credit bureau has published a list of the U.S. cities with the highest levels of credit card debt, as illustrated in this Credit.com slide show.
The average American had 1.93 credit cards in their wallet in December, a 23% drop since 2007, the study found. Each card had a balance of $4,283 on average, a 4% decline since 2007.
In many cases, getting rid of some credit cards means racking up higher balances on the cards that are left. The average American is using 30% of their available credit card balance, a 10% increase over the average credit utilization rate in 2010.
That can hurt people in the long run by damaging their credit scores, because lenders tend to view people who use a lot of their available credit as high-risk borrowers (hence the old conundrum that the people with the best credit are those who use it the least).
“Basically any utilization rate above 10% starts affecting your credit score,” says Gerri Detweiler, Credit.com’s personal finance expert. “It’s a reminder of why it’s important to keep your balances low.”
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Experian also released a list of the cities with the highest average credit utilization rates. Though people in other cities may keep higher outstanding balances on their cards, the raw dollar amount doesn’t matter as much as the utilization rate when calculating somebody’s credit score.
The reason why is pretty obvious. If I ran up a $4,283 balance on my credit card, at the current average interest rate of 14.73% APR it would take me eight years of minimum monthly payments and $1,343 in interest charges to pay it off.
If Warren Buffet charged $4,283 on his credit card, he could call it “lunch.” The effect on his credit score and his personal finances would be nil.
So here’s Experian’s list of the 15 U.S. cities with the highest credit card debt, sorted by their average utilization rates….