Understanding Your Debt-to-Credit Ratio

Also known as your credit utilization rate, a debt-to-credit ratio refers to how much debt you have in relation to how much credit you have available. If you hope to be a responsible borrower and increase your credit score, it's important to understand your debt-to-credit ratio and how it might affect your financial decision-making.

What is debt-to-credit ratio?

Your debt-to-credit ratio is an indicator of the percentage of available credit being used.

You can calculate your debt-to-credit ratio by dividing the total amount of debt you have by the amount of credit available to you.

For example, let's say you have a credit card with a $6,000 credit limit. If you go on a shopping spree and spend $2,000 with that credit card, you now have $2,000 in debt. Your debt-to-credit ratio is $2,000 divided by $6,000, which is 33.3%.

Let's say you have another credit card with a credit limit of $5,000, and you have $2,500 in debt on it. Your debt-to-credit ratio for this card is 50%, but your total debt-to-credit ratio on both accounts is 41%.

It's important to consider all of your accounts when calculating your debt-to-credit ratio because that's what the major credit bureaus will do.

How does credit utilization affect my credit score?

The higher your debt-to-credit ratio is, the lower your credit score will likely be. In fact, your debt utilization ratio comprises 30% of your FICO score, which is the primary credit score used by lenders.

A high credit utilization ratio is viewed as a negative thing because the more money you owe, the harder it will be to pay off. Lenders tend to see high debt-to-credit ratios as a liability, because it could indicate that you’re not responsible with your spending. While your debt-to-credit ratio isn't the only thing to determine your credit score, it's a big one!

What is a good debt-to-credit ratio?

Ideally, your debt-to-credit ratio should be at or below 30%. This means that if you have a $6,000 credit limit, your debt should never be higher than $1,800. While keeping a low debt-to-credit ratio can be difficult and takes discipline, your credit score will be better for it. A low debt-to-credit ratio also means you have more credit at your disposal in case an emergency pops up!

How do I find my debt-to-credit ratio?

Now that you know how important your debt-to-credit ratio is, you're probably wondering how you can find and monitor it. Here's how to find and calculate your debt-to-credit ratio:

  1. Log in to the credit card or personal loan account you want to calculate.
  2. Find both your current balance (the amount you owe) and your approved credit limit.
  3. Divide your total debt by your credit limit to get your debt-to-credit ratio for that account.
  4. If you have multiple credit accounts, divide your total debts by your total available credit for your overall debt-to-credit ratio.

Debt-to-credit vs. debt-to-income ratios: What's the difference?

Because they sound similar, debt-to-credit ratios are often confused with debt-to-income ratios. While both terms use debt as a comparison tool, that's where the similarities end.

Rather than comparing the amount of debt you have to the amount of credit available to you, a debt-to-income ratio compares your debts to your total income. Debt-to-income is expressed in monthly terms and compares your monthly debt payments to your monthly income.

For example, let's say that you make $4,000 per month. Now, let's say you have the following monthly payments:

  • $650 for student loans
  • $600 for a mortgage
  • $250 for a car payment
  • $500 for a personal loan payment

In this scenario, your total monthly debt payments equal $2,000. If you have a monthly income of $4,000, your debt-to-income ratio is 50%. Keep in mind that the debt-to-income ratio doesn't account for other monthly payments like insurance, your phone bill, groceries, and more.

Does my debt-to-income ratio affect my credit score?

In the same way that your debt-to-credit ratio affects your credit score, so too does your debt-to-income ratio. The higher your debt-to-income ratio, the higher your debts are in comparison to your disposable income.

When your ratio is too high, it indicates to lenders that you may not be able to afford any new debt, which can make them reluctant to lend you more money. This will often result in a lower credit score because you're a higher lending liability.

How do I improve my debt-to-credit ratio?

If you calculated your debt-to-credit ratio and found that it needs improvement, here are a few helpful tips and tricks:

  • Pay your credit card balance every week or two rather than waiting until the end of the month.
  • If you’ve been a reliable customer for a while, contact your credit card company and ask for a credit increase.
  • Even if you don't use old credit accounts, keep them open. That way, even though you aren't using the account, it will count towards your total available credit, resulting in a higher debt-to-credit ratio.
  • If your credit card debt is getting too high, consider paying for things with cash, a check, or a debit card.
  • Open new credit accounts to increase your total available credit.
  • Put off charging large purchases to credit cards until your debt-to-credit ratio is near zero.
  • Monitor and track your debt-to-credit ratio so you can pay down debts before they get too high.

Take control of your debt-to-credit ratio and improve your credit score

Understanding your debt-to-credit ratio and knowing how to calculate it can help you improve and maintain a good credit score. The higher your credit score, the easier it will likely be to qualify for new credit and loans with favorable interest rates, terms, and conditions.

In the meantime, if you’re faced with emergency bills or unexpected costs and need an immediate solution, we can help. Find the nearest Advance America near you or explore your loan options online now.

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