Debt-to-Credit Ratio

Your debt-to-credit ratio, also called debt utilization ratio, is a comparison between how much debt you owe and the amount of credit you still have available. This number accounts for a portion of your credit score.

You can use this formula to calculate your debt-to-credit ratio:

  • Total up your credit limits for all open credit lines.

  • Separately, add up all of the debt accumulated on those accounts.

  • Divide the total debt by the total available credit to get your debt-to-credit ratio. 

  • (sum of all debt)/(sum of all credit extended—i.e., the outstanding balances on each account) x 100 = debt-to-credit ratio.

For example, let’s say you have two credit cards: one with a credit limit of $1,000 and one with a credit limit of $500. That means your total available credit is $1,500. If you were to charge $500 on the first credit card and none on the second, your total debt would be $500. Divide the total debt by the total available credit ($500 ÷ $1,500 = 0.33). Your debt-to-credit ratio is 33%.

In general, lenders like to see borrowers with debt-to-credit ratios at or below 30%. A higher ratio may affect your ability to get a credit card or could cost you more in terms of higher interest. The best way to improve your ratio is to pay down your debts and responsibly use the credit you already have.

Balance Transfers

A balance transfer allows you to move debt from a high-interest credit card rate to a card with a lower interest rate. Some cards offer a lower interest rate for a set period of time as long as you make the minimum monthly payments. Because you’re paying less interest, more of your payments go toward paying down the debt.

Paying more than the minimum on this balance also helps you pay off the debt quicker. This improves both your debt-to-credit ratio and your credit score.

Be sure you understand the terms of the balance transfer and what happens if you don’t pay off the balance by the time the promotional rate expires and before you transfer your balance.

Secured Cards

A secured credit card can be helpful if you’re trying to establish a credit history or recover from a history of poor money management. These cards function similarly to debit cards in that you deposit money into a deposit account. This deposit may determine your credit limit. For instance, if you put $500 into the account, then you can make $500 in purchases with the card. Not all credit card companies that issue secured cards report payment histories to the credit bureaus. Make sure yours does so your secured card can help your credit score.

Credit History

The length of your credit history, or how long you’ve been using credit, factors into your credit score. A longer credit history, especially one with a record of on-time payments and a mix of credit accounts, can be good for your score. If you stop using credit cards altogether, your credit score may take a hit. Instead, you should use at least one card on a regular basis to continue adding to your existing credit history.

Your payment history is also a big determinant of your credit score, accounting for a portion of your score. That is why it’s so important to make sure all payments are on time. For late or missed payments, FICO considers how late the payment was, how much was owed, how recently it happened and how many there were.

Putting It All Together

It takes time to see improvements in your credit score, but each positive step makes a difference. You can keep an eye on your efforts by regularly reviewing your credit report. Every 12 months, you can request free copies of your credit reports from each of the three major credit bureaus via Annual Credit Report.

When you get your reports, carefully check identifying information, such as your name, address and Social Security Number. Make sure all of the credit accounts listed belong to you and that the information is correct and current. Immediately report errors to the credit bureau.  

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