Mint.com ranked which states’ residents are most in danger of overusing their credit cards. They measured that by looking at their credit utilization ratios, a fancy term meaning how much of your credit card’s maximum limits you’ve used up. For example, if your credit card balance at any time during the month is $300 and your credit limit is $1,000, then your credit utilization is 30%.
Why the credit utilization ratio is so important, and how you may be jinxing your credit score
The credit utilization ratio is critical because it makes up roughly 30% of your overall credit score. That means “it’s no small part of what lenders look at when considering what interest rate and terms to give you on your mortgage, car loan or other credit cards,” says Mint.com.
And here’s the problem. Most people, especially younger consumers, assume they can keep charging until they hit their credit limit. While technically that may be true, if you do so you’ll end up with a big black mark next to your name in the big black book of credit scores.
According to Mint.com, you shouldn’t charge more than 10% of your credit card’s limits if you want to keep your credit score in pristine condition.
“Though there isn’t an exact code, the rule of thumb is that consumers who use less than 10% of their available credit tend to be those with the highest credit scores,” says Credit.com Co-Founder and Chairman Adam Levin in the Mint.com article.
CreditKarma.com, an online credit advice site, says never to let your utilization rate go above 30%. In fact, its research shows that people with the coveted 700+ credit scores have credit card utilization ratios well below 30%, with the best scores corresponding to 0-10% utilization ratios.
Why are high utilization ratios so damaging? It shows people are “close to being tapped out on their credit lines, which is a signal to lenders that they are a riskier borrower than those with lower utilization ratios,” explains Mint.com.
(Financial Tip: remember to educate your twenty-something kids about the importance of good credit, and why they need to avoid charging up to their credit card limits. It may not make much sense to them, but that’s the way it is!)
Which states are most in danger
For once, we’re relieved to not see Florida on the list.
Mint.com ranked states by how much of their available credit limit had been used up. That doesn’t necessarily mean they maintain the highest balances, but does mean they’re most in danger of stretching their financial capacity to pay those loans back.
So which states are on the top ten “bad” list?
Here they are, with Alaska topping the “worst” list:
- Alaska: with an average balance of $4,563, an average limit of $16,453, and average utilization of 27.73%
- South Carolina
For a link to the complete Mint.com article, please click here.