According to a new survey from Credit Karma, Detroit has the highest credit card utilization rate in America for adults age 18 to 24. A credit card utilization rate is a ratio of a person’s credit card debt to his or her available credit limit. Detroit’s average credit card utilization rate was 68.3%, which means that young adults with credit cards in the Detroit area are carrying a balance that is more than half of their available credit. Why is this rate so high, and what can Detroit residents do to change those statistics moving forward?
Understanding Credit Card Utilization Rates
Before we can assess why Detroit has such a high credit card utilization rate, we need to understand what that term actually means. Mathematically, this is the total credit card balance someone owes on all credit cards divided by the total credit card limit available to him or her. For example, let’s say you have three credit cards, each with a $500 credit limit. You owe $100 on each card, for a total of $300 in credit card debt. Divide your $300 balance by the $1500 credit limit, and you get a credit card utilization rate of 20%. You have used 20% of the credit available to you.
Credit card utilization rates play a large role in determining a person’s credit score and creditworthiness for future lending applications. Ideally, the rate should be below 30%. High credit card utilization rates indicate high spending and low payments, which may lead banks to believe that you are not good at managing your debt. People with low card utilization rates either choose not to use the credit available to them, or they pay off their balances quickly.
Possible Causes Of Detroit’s High Credit Card Debt Among Young Adults
Why does Detroit have such a high credit card utilization rate among young adults? There are many potential explanations, all with their own unique solution. Part of this may be the result of addictive behaviors, like shopping addiction, impulse buying, hoarding, gambling addiction, etc. Many young adults develop bad spending habits early on because they do not know how to properly control their finances. Being able to buy what they want, when they want is an addictive opportunity – one that comes with costly consequences.
Another possible cause of high credit card utilization rates is depression. Some people who struggle with depression use shopping and spending money as a way to overcome or cope with their emotions. Shopping can become a distraction, and the high of buying something new can make feelings of sadness and hopelessness fade away, even if it’s only for a moment. Many cases of childhood depression go unnoticed or untreated, and they can develop into adult depression later on. No matter what the circumstances may be, it is not uncommon to see someone with major depressive episodes also dealing with debt and financial trouble. That leads to more depression, which leads to more spending, and the vicious cycle continues.
Some may blame the high credit utilization rates on a lack of financial education in America as a whole, not just Detroit. The country is transitioning toward a cashless society, where cards and mobile wallets reign supreme. After high school, young adults enter a world filled with plastic “opportunities.” They see credit cards as free money, rather than sources of debt they have to pay back. By teaching children about credit cards and debt before they become adults, we may be able to cut down on the utilization rates moving forward.
Solutions: How To Overcome High Credit Card Debt In Detroit
Now that we know what the problem is, it’s time to think of a possible solution. This will largely depend on what is causing the high credit card debt in the first place. People suffering from addiction, depression, or other mental health issues may seek the help of a professional counseling center to overcome their impulses. If you are in this predicament, you could work with a counselor or therapist to understand why you behave a certain way and what you can do to prevent those actions in the future.
If the credit card debt is the result of poorly managed finances, you may need to work with an accountant or financial planner to help you create a budget. This budget should include money set aside for personal savings, debt repayment, bills, and personal spending each month. Once you know what you can afford to spend on clothes, food, entertainment, and more, you can avoid hefty credit card bills. Note that if your finances have become overwhelming, you can still speak to a licensed counselor to get through the stress and move forward to a better quality of life.